# Strangle (options)

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In [finance](/source/Finance), a **strangle** is an [options strategy](/source/Options_strategy) involving the purchase or sale of two [options](/source/Option_(finance)), allowing the holder to profit based on how much the price of the [underlying](/source/Underlying) security moves, with a neutral exposure to the *direction* of price movement. A strangle consists of one [call](/source/Call_option) and one [put](/source/Put_option) with the same expiry and underlying but different [strike prices](/source/Strike_price). Typically the call has a higher strike price than the put. If the put has a higher strike price instead, the position is sometimes called a **guts**.[1]

If the options are purchased, the position is known as a [long](/source/Long_(finance)) strangle, while if the options are sold, it is known as a [short](/source/Short_(finance)) strangle. A strangle is similar to a [straddle](/source/Straddle) position; the difference is that in a straddle, the two options have the same strike price. Given the same underlying security, strangle positions can be constructed with a lower cost but lower probability of profit than straddles.

## Characteristics

A strangle,[note 1] requires the investor to simultaneously buy or sell both a call and a put option on the same underlying security. The strike price for the call and put contracts are usually, respectively, above and below the current price of the underlying.[2][3][4]

### Long strangles

The owner of a long strangle profits if the underlying price moves far away from the current price, either above or below. Thus, an investor may take a long strangle position if they think the underlying security is highly [volatile](/source/Volatility_(finance)), but does not know which direction it is going to move. This position has limited risk, since the most a purchaser may lose is the cost of both options. At the same time, there is unlimited profit potential.

### Short strangles

Short strangles have unlimited losses and limited potential gains; however, they have a high probability of being profitable. The assumption of the short seller is neutral, in that the seller would hope that the trade would expire worthless in-between the two contracts, thereby receiving their maximum profit.[3][4] Short strangles exhibit asymmetrical risk profiles, with larger possible maximum losses observed than the maximum gains to the upside.[5]

Active management may be required if a short strangle becomes unprofitable. If a strangle trade has gone wrong and has become biased in one direction, a seller might add additional puts or calls against the position, to restore their original neutral exposure.[3] Another strategy to manage strangles could be to roll or close the position before expiration; as an example, strangles managed at 21 days-to-expiration are known to exhibit less negative [tail risk](/source/Tail_risk),[note 2] and a lower [standard deviation](/source/Standard_deviation) of returns.[note 3][6]

## See also

- [Condor (options)](/source/Condor_(options))
- [Ladder (option combination)](/source/Ladder_(option_combination))

## Notes

1. Sometimes known in its short form as a **top vertical combination**, and in its long form as a **bottom vertical combination**.[2]

1. Tail risk is the risk associated with large moves in one direction.

1. Standard Deviation is a measure of volatility.

## References

1. Natenberg, Sheldon (2015). "Chapter 11". *Option volatility and pricing: advanced trading strategies and techniques*. Second ed. New York. ISBN 9780071818780.

1. Hull, John C. (2006). *Options, futures, and other derivatives*. 6th ed. Upper Saddle River, N.J.: Pearson/Prentice Hall. pp. 234–236. ISBN 0131499084.

1. McMillan, Lawrence (2002). *Options as a strategic investment*. 4th ed. [New York Institute of Finance](/source/New_York_Institute_of_Finance). pp. 315–320. ISBN 9780735201972.

1. Natenberg, Sheldon (22 August 1994). *Option Volatility and Pricing: Advanced Trading Strategies and Techniques*. [McGraw-Hill](/source/McGraw-Hill). pp. 315–320. ISBN 9780071508018.

1. Kownatzki, Clemens; Putnam, Bluford; Yu, Arthur (27 July 2021). ["Case study of event risk management with options strangles and straddles"](http://explore.bl.uk/primo_library/libweb/action/display.do?tabs=detailsTab&gathStatTab=true&ct=display&fn=search&doc=ETOCvdc_100146761097.0x000001&indx=1&recIds=ETOCvdc_100146761097.0x000001). *Review of Financial Economics*. [ISSN 1058-3300](https://www.worldcat.org/issn/1058-3300)

1. Spina, Julia (2022). *The Unlucky Investor's Guide to Options Trading*. [Wiley](/source/Wiley_Publishing). ISBN 9781119882657.

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