InvestorQ : How do you define a strangle strategy?
Ria Roy made post

How do you define a strangle strategy?

user profile image
Mahil Khan answered.
2 years ago

A strangle strategy is when you buy a call and put option on the same stock or index. Of course that is a long strangle. For example assume that the current price of Maruti is Rs.7500. You are fairly clear that Maruti will have an upside breakout. But considering the volatility in the market, you also want to protect yourself in case the stock moves down due to negative auto sector cues. The answer is you buy a put and a call on the stock. In this case, you can buy a Maruti 7600 call and a Maruti 7400 put. Assume that the call is quoting at Rs.70 and the put is quoting at Rs.60. Therefore the total cost of your strategy will be Rs.130. Technically you will be profitable if either Maruti moves above 7630 or moves below 7270. At that price the entire cost of the strategy gets covered and you start to make a profit. A long strangle is only used when you expect the stock to be very volatile. What to do if the stock is likely to be range bound? You can do a reverse strangle or a short strangle. In that case you will profitable if the stock is within that range.