Options Trading Strategies: Long Strangle

The long strangle (otherwise called a buy strangle) is a two-legged strategy, created by buying one Out of The Money put and one Out of The Money call, both with the same expiration date.

A long strangle is a cheaper adaptation of a long straddle.

When to use this strategy?

You are direction  neutral and bullish on volatility, and looking for a strategy with a limited risk for a capital gain.

Below is a Profit and Loss chart example of a long strangle options strategy:

Pros:

Capped maximum loss and uncapped potential profit potential. Cheaper than trading a long straddle. 

Cons:

You need a dramatical movement of the BTC/ETH price to make a profit.

Example:

In this example, BTC is trading at 43,822.31 USD, and you expect its price to significantly move in either direction. You have bought an OTM put with a strike price 43,000.00 and an OTM call with a strike price of 45,000.00 USD, with an expiration date of February 9^th 2022.

As this is a net debit spread, you have paid a net premium of 452.20 USD which is also your maximum loss.

The Profit and Loss chart is given below:

Upon expiration:

If the BTC price is below the OTM put strike, the call expires worthless, the long put is exercised, so you are in the profit as long as the bitcoin price ends up below the first break-even point.

If the BTC price is at any of the strike prices or between the strike prices, then both the call and the put expire worthless, and you are at your maximum loss.

If the BTC price is above the OTM call strike price, the put expires worthless, the long call is exercised, so you are in the profit as long as the bitcoin price ends up above the second break-even point.

BTC at Expiry (USD)	Payoff (USD)
41,593.00	+981.80
42,142.00	+432.80
42,547.80 (break even 1)	0
42,780.00	-205.20
43,000.00 & 45,000 (LP OTM & LC OTM)	-425.20 (max loss is between strikes)
45,198.00	-227.20
45,425.20 (break even 2)	0
45,641.00	+215.80
46,314.00	+888.80