A strangle is conceptually the same as strangle, but there is a small difference. We know that in case of straddle you buy the call and the put at the same strike price. However, sellers of straddles are not too willing because it leads to a small area of profit for them. Hence many option sellers prefer to sell strangles. What happens in a strangle is that the call is of a higher strike and the put is of a lower strike. Hence the seller of the strangle gets more room to make money and is more fair to them in a volatile market.

What happens in a long strangle is that you buy a call option and you also buy a put option of higher and lower strike prices respectively. Here the call premium and the put premium put together will be your total cost of the strategy. However, unlike straddle, the cost is lower to the buyer of the strangle because the call is of a higher strike price and the put is of a lower strike price. For the seller the strangle offers more room to make profits compared to a straddle. The total premium of call and put will also be your maximum loss on the strangle strategy. What happens if the dollar strengthens? The movement has to be sufficient on the upside to cover the cost of the call and the put? What happens if the dollar weakens versus the rupee? Here again, you need enough movement to cover the total cost of the strangle strategy. The selection of the strike for the straddle is very important and typically strangles are purchased when there is volatility and you expect the volatility of the stock or the index to go up sharply in the coming days. You have two break evens in the Long strangle. You can either make profits on the downside or you can make profits on the upside. Both the directions, you need to cover the total cost of the strategy (i.e. the cost of the call option and the put option) and then profits can be unlimited from that level. Let us look at the table below before drawing our inferences…

Buy Put

71.00

Prem

0.15

Strategy

Long Strangle

USD-INR Spot

72/$

Buy Call

73.00

Prem

0.10

Double Break Even Point

Upper and Lower

Price

Buy Put

Premium

Buy Call

Premium

Total Premium

Put - ITM/OTM

Buy Put P/L

Call - ITM/OTM

Buy Call P/L

Net Pay-Off

68.00

71.00

0.15

73.00

0.10

0.25

ITM

2.85

OTM

-0.10

2.75

68.50

71.00

0.15

73.00

0.10

0.25

ITM

2.35

OTM

-0.10

2.25

69.00

71.00

0.15

73.00

0.10

0.25

ITM

1.85

OTM

-0.10

1.75

69.50

71.00

0.15

73.00

0.10

0.25

ITM

1.35

OTM

-0.10

1.25

70.00

71.00

0.15

73.00

0.10

0.25

ITM

0.85

OTM

-0.10

0.75

70.50

71.00

0.15

73.00

0.10

0.25

ITM

0.35

OTM

-0.10

0.25

71.00

71.00

0.15

73.00

0.10

0.25

ATM

-0.15

OTM

-0.10

-0.25

71.50

71.00

0.15

73.00

0.10

0.25

OTM

-0.15

OTM

-0.10

-0.25

72.00

71.00

0.15

73.00

0.10

0.25

OTM

-0.15

OTM

-0.10

-0.25

72.50

71.00

0.15

73.00

0.10

0.25

OTM

-0.15

OTM

-0.10

-0.25

73.00

71.00

0.15

73.00

0.10

0.25

OTM

-0.15

ATM

-0.10

-0.25

73.50

71.00

0.15

73.00

0.10

0.25

OTM

-0.15

ITM

0.40

0.25

74.00

71.00

0.15

73.00

0.10

0.25

OTM

-0.15

ITM

0.90

0.75

74.50

71.00

0.15

73.00

0.10

0.25

OTM

-0.15

ITM

1.40

1.25

75.00

71.00

0.15

73.00

0.10

0.25

OTM

-0.15

ITM

1.90

1.75

75.50

71.00

0.15

73.00

0.10

0.25

OTM

-0.15

ITM

2.40

2.25

76.00

71.00

0.15

73.00

0.10

0.25

OTM

-0.15

ITM

2.90

2.75

76.50

71.00

0.15

73.00

0.10

0.25

OTM

-0.15

ITM

3.40

3.25

77.00

71.00

0.15

73.00

0.10

0.25

OTM

-0.15

ITM

3.90

3.75

What are the inferences that you can draw from the table calculation above pertaining to the Long Strangle strategy. Here are the key observations.

· The total cost of the entire strangle strategy is 0.25. That is because, the trader pays 0.15 for buying the 71 strike USD-INR put option and also pays 0.10 for purchasing the 73 strike USD-INR call option.

· As a result the two premium costs of the put and the call are added together to arrive at the breakeven point. There will be break even on the upside and also on the downside. Since, the total cost is Rs.0.25 for the strangle (adding the call and put premiums together), the upper breakeven point will be 73.25. On the downside the breakeven point will be Rs.70.75.

· Between the levels of 70.75 and 73.25, the trader will not make any money on the USD-INR straddle. However, once the USD strengthens above 73.25 or weakens below 70.75, the trader turns profitable and then the profits can be unlimited from that level onwards. The maximum loss on the strangle strategy is 0.25 which is the total cost of the call and the put together. This loss occurs in the price range of Rs.71 to Rs.73, which is the strike on which the put and the call are purchased respectively. This Strangle strategy works perfectly when you expect the USD to become very volatile but you are not sure of the direction of the volatility. That is when strangle works best and the total cost of the strategy and the maximum loss is much lower than in the case of the straddle.

· On the upside and the downside of the USD-INR movements, once the breakeven levels are crossed, then profits can be unlimited to an unending level.

Now it is all fine and good if you are having a volatile view on the US Dollar versus the rupee. But, what happens if you have a range bound view on the US dollar. The answer is simple. You can just reverse the above strategy. If you have a range bound view, then you just sell the Strangle. That means you sell the lower put and also sell the higher call of respective strike prices. But, how will the cash flows look like?

Sell Put

71.00

Prem

0.15

Strategy

Short Strangle

USD-INR Spot

72/$

Sell Call

73.00

Prem

0.10

Double Break Even Point

Upper and Lower

Price

Sell Put

Premium

Sell Call

Premium

Total Premium

Put - ITM/OTM

Sell Put P/L

Call - ITM/OTM

Sell Call P/L

Net Pay-Off

68.00

71.00

0.15

73.00

0.10

0.25

ITM

-2.85

OTM

0.10

-2.75

68.50

71.00

0.15

73.00

0.10

0.25

ITM

-2.35

OTM

0.10

-2.25

69.00

71.00

0.15

73.00

0.10

0.25

ITM

-1.85

OTM

0.10

-1.75

69.50

71.00

0.15

73.00

0.10

0.25

ITM

-1.35

OTM

0.10

-1.25

70.00

71.00

0.15

73.00

0.10

0.25

ITM

-0.85

OTM

0.10

-0.75

70.50

71.00

0.15

73.00

0.10

0.25

ITM

-0.35

OTM

0.10

-0.25

71.00

71.00

0.15

73.00

0.10

0.25

ATM

0.15

OTM

0.10

0.25

71.50

71.00

0.15

73.00

0.10

0.25

OTM

0.15

OTM

0.10

0.25

72.00

71.00

0.15

73.00

0.10

0.25

OTM

0.15

OTM

0.10

0.25

72.50

71.00

0.15

73.00

0.10

0.25

OTM

0.15

OTM

0.10

0.25

73.00

71.00

0.15

73.00

0.10

0.25

OTM

0.15

ATM

0.10

0.25

73.50

71.00

0.15

73.00

0.10

0.25

OTM

0.15

ITM

-0.40

-0.25

74.00

71.00

0.15

73.00

0.10

0.25

OTM

0.15

ITM

-0.90

-0.75

74.50

71.00

0.15

73.00

0.10

0.25

OTM

0.15

ITM

-1.40

-1.25

75.00

71.00

0.15

73.00

0.10

0.25

OTM

0.15

ITM

-1.90

-1.75

75.50

71.00

0.15

73.00

0.10

0.25

OTM

0.15

ITM

-2.40

-2.25

76.00

71.00

0.15

73.00

0.10

0.25

OTM

0.15

ITM

-2.90

-2.75

76.50

71.00

0.15

73.00

0.10

0.25

OTM

0.15

ITM

-3.40

-3.25

77.00

71.00

0.15

73.00

0.10

0.25

OTM

0.15

ITM

-3.90

-3.75

What are the inferences that you can draw from the table calculation above pertaining to the Short Strangle strategy. Here are the key observations.

· The total premium income of the entire short Strangle strategy is 0.25. That is because, the trader earns 0.15 for selling the 71 strike USD-INR put option and also earns 0.10 for selling the 73 strike USD-INR call option.

· As a result the two premium incomes of the put and the call are added together to arrive at the breakeven point. There will be break even on the upside and also on the downside. Since, the total income is Rs.0.25 for the Strangle (adding the call and put premiums together), the upper breakeven point will be 73.25. On the downside the breakeven point will be Rs.70.75.

· Between the levels of 70.75 and 73.25, the trader will actually be profitable on the USD-INR short Strangle. However, once the USD strengthens above 73.25 or weakens below 70.75, the trader runs into a loss and then the losses can be unlimited from that level onwards on both the sides. The maximum profit on the strategy is 0.25 which is the total premium income from the call and the put together. This maximum profit occurs in the price range of 71 to 73, which is the strike on which the call and the put are sold. This strategy works perfectly when you expect the USD to range bound in a range but are not sure of the direction of the market. That is when short Strangle works best and compared to a straddle, the Strangle gives you the seller more room to be profitable.

On the upside and the downside of the USD-INR movements, once the breakeven levels are crossed, then losses can be unlimited to an unending level. It is only within the two breakeven levels that the currency trader can be profitable. Hence this strategy of short Strangle must either be done very carefully or must be done with strict stop losses on both sides of the trade.