Strangle explained — profit in either direction

okx learn
OKX Learn
2022.06.30

A strangle is an options strategy that involves the investor or trader holding both call and put options for the same cryptocurrency — in our case — with the same expiration date but different strike prices.

A strangle is similar to a straddle strategy, in that both strategies involve holding both call and put options with the same expiration date for the same coin or token. However, a straddle requires both options to be at the same strike price, while a strangle requires them to have different strike prices.

Also similar to a straddle is the fact that a strangle is most profitable in the event of a sharp price swing, and is generally utilized when the trader expects volatility but is unsure about which direction a major move will take.

Long vs. short strangles

There are two types of strangle strategies in options trading:

  • Long strangle
  • Short strangle

Long strangles are the more popular strategy of the two.

To execute a long strangle, an investor must purchase a call and a put option, at the same time. Both would be out-of-the-money, while the call’s strike price would be higher than the cryptocurrency’s current market price. The put’s strike price would, as expected, be lower than the coin or token’s current market price. The premium paid for both contracts represents the trade’s risk.

With this set-up, the upside-profit potential is extremely high (in theory) if the cryptocurrency experiences an upward surge in price. However, profit potential also exists if the coin or token’s price falls.

Similarly, an investor looking to execute a short strangle would sell puts and calls, at the same time, both of which are out-of-the-money. Dissimilar to a long strangle, however, is the reduced potential for profit — requiring the cryptocurrency to trade in a relatively tight range, as the maximum profit is equal to the premium paid by the contracts’ buyer.

Strangle vs. straddle — which is better?

Both strangles and straddles are options strategies that allow investors undecided on the direction of a cryptocurrency’s next move to profit on a large swing in either direction.

Generally speaking, a strangle usually costs less to execute than a straddle. However, the latter carries less risk, as a smaller move is usually needed to create a profitable trade.