Snapshot
Legs
Buy 1 Out-of-the-Money Put + Buy 1 Out-of-the-Money Call
Outlook
High Volatility / Direction Agnostic
Max profit
Unlimited to the upside, Substantial to the downside
Max Loss
Net debit paid
A long strangle option strategy involves buying an out-of-the-money call option and an out-of-the-money put option at the same time for the same stock and expiration date. You pay a cash debit upfront to enter both positions. Traders use this strategy when they expect a huge price movement in the underlying stock but are unsure whether the move will be up or down, such as right before a major earnings report.
The maximum loss is limited to the total cost paid upfront to buy both options, occurring if the stock remains stuck between the two strike prices through expiration. Profit potential is unlimited if the stock rises significantly and substantial if the stock plummets, as long as the move is large enough to cover the initial cost.
Example
Stock
$100
Trade
- Buy $95 Put for $2.00
- Buy $105 Call for $2.00
→ $4.00 debit ($400)
Breakevens
$91.00 / $109.00
Outcomes
- Stock between $95 and $105: -$400 Max Loss
- Stock at $91 or $109: $0 Breakeven
- Stock outside the wings: Profit (e.g., +$300 at $112; +$600 at $85)