In finance, a strangle is an options strategy involving the purchase or sale of two options, allowing the holder to profit based on how much the price of the underlying security moves, with a neutral exposure to the direction of price movement. A strangle consists of one call and one put with the same expiry and underlying but different strike prices. 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 strangle, while if the options are sold, it is known as a short strangle. A strangle is similar to a 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 lower cost and 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 makes a profit 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, but does not know which direction it is going to move. This position is a 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 are known to exhibit asymmetrical risk profiles, with larger possible maximum losses being observed compared than the maximum gains to the upside.^[5]

Active management may be required if a short strangle has become 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, in order 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^{[note 2]}, and a lower standard deviation of returns.^{[note 3][6]}