Is a buying Strangle strategy same as buying Straddle and when it is used?
Answer
Answer
Answer
When you are bullish on the market you can buy a call and when you are bearish on the market you can buy a put option. But what do you do when you are not sure of the direction of the market? If you are expecting Infosys to display volatile price movements but you are not sure if the price will move up or whether it will move down. If you are extreme volatility in the stock then you can buy a call and a put. If you buy a call and put on the same strike it is a straddle while if you buy call on a higher strike and put on a lower strike then it becomes a strangle. The cost of the strangle is lower than a straddle since the call and the put are out of the money. This makes your base flatter instead of sharp like a straddle. Here is how the payoffs will look like.
Buy Strangle by buying RIL 1140 call at Rs.22 and buying RIL 1060 put at Rs.18
Long Call Strike
RIL CMP
Diff
ITM/OTM
Call Premium
P&L on Call
Call Profit
long Put Strike
RIL CMP
Diff
ITM/OTM
Put Premium
P&L on Put
Put Profit
Total Profit
1140
900
-240
OTM
-22
0
-22
1060
900
160
ITM
-18
160
142
120
1140
920
-220
OTM
-22
0
-22
1060
920
140
ITM
-18
140
122
100
1140
940
-200
OTM
-22
0
-22
1060
940
120
ITM
-18
120
102
80
1140
960
-180
OTM
-22
0
-22
1060
960
100
ITM
-18
100
82
60
1140
980
-160
OTM
-22
0
-22
1060
980
80
ITM
-18
80
62
40
1140
1000
-140
OTM
-22
0
-22
1060
1000
60
ITM
-18
60
42
20
1140
1020
-120
OTM
-22
0
-22
1060
1020
40
ITM
-18
40
22
0
1140
1040
-100
OTM
-22
0
-22
1060
1040
20
ITM
-18
20
2
-20
1140
1060
-80
OTM
-22
0
-22
1060
1060
0
ATM
-18
0
-18
-40
1140
1080
-60
OTM
-22
0
-22
1060
1080
-20
OTM
-18
0
-18
-40
1140
1100
-40
OTM
-22
0
-22
1060
1100
-40
OTM
-18
0
-18
-40
1140
1120
-20
OTM
-22
0
-22
1060
1120
-60
OTM
-18
0
-18
-40
1140
1140
0
ATM
-22
0
-22
1060
1140
-80
OTM
-18
0
-18
-40
1140
1160
20
ITM
-22
20
-2
1060
1160
-100
OTM
-18
0
-18
-20
1140
1180
40
ITM
-22
40
18
1060
1180
-120
OTM
-18
0
-18
0
1140
1200
60
ITM
-22
60
38
1060
1200
-140
OTM
-18
0
-18
20
1140
1220
80
ITM
-22
80
58
1060
1220
-160
OTM
-18
0
-18
40
1140
1240
100
ITM
-22
100
78
1060
1240
-180
OTM
-18
0
-18
60
1140
1260
120
ITM
-22
120
98
1060
1260
-200
OTM
-18
0
-18
80
1140
1280
140
ITM
-22
140
118
1060
1280
-220
OTM
-18
0
-18
100
1140
1300
160
ITM
-22
160
138
1060
1300
-240
OTM
-18
0
-18
120
This strangle is a typically volatile strategy like a straddle but it entails a lower cost since its strikes are spread wide apart. This strategy only works when the markets are volatile either ways because you need to cover the premium cost of the put and the call. The maximum loss as can be seen in the above chart will be Rs.40 and it will occur at the strike range (1060 to 1140) in which the Strangle is created. The breakeven point on the downside will be 1020 (1060 – 40) while on the upside the breakeven level will be 1180 (1140 + 40). As long as the RIL price stays within this range, you will lose money on the long strangle. The moment the price goes outside this range, you start gaining on the Strangle.