Long Strangle is a strategy to be used when the investor is Neutral on the market direction and bullish on volatility.
This strategy involves buying an “Out-of-the-Money Call Option” and buying an “Out-of-the-Money Put Option”. Both options must have the same underlying security and expiration month.
Long Strangle is a slight modification to the Long Straddle to make it cheaper to execute.
The investor makes profit when the underlying makes significant movement on the upside or downside. The strategy has limited downside.
Investor view: Neutral on direction but bullish on volatility of the Stock/ Index.
Risk: Limited to net premium paid.
Upper breakeven: Buy Call Strike price + net premium paid.
Lower breakeven: Buy Put Strike price – net premium paid.