Strangle is another derivative option strategy. This strategy gives the holder the ability to profit based on how much the price of the underlying security moves with relatively minimal prediction what direction the price will have. In strangle the investor holds both call and buy positions with the same strike price and expiration date. This is a good strategy if the underlying asset has large price movements. The purchase of the strategy is called long strangle and the sale of the strategy is short strangle. As compared with straddles that use at-the money-options, strangles use out-at-the-money options.
Long strangle, also known buy strangle, is long a call and a put option with the same expiration, but where the call strike price is above the put strike price and both options are out-of-the-money. The long options strangle is an unlimited profit, limited risk strategy that is used when the traders think that soon the underlying stock will show high volatility.
Short strangle, know also sell strangle, makes a profit if the underlying price stays within the boundaries of the strike price of which they would be exercised, either above or below. This option strategy is a limited profit, unlimited risk options trading strategy that is used when the option trader thinks that the underlying stock soon will show little volatility.