Long Strangle

A long strangle is an options trading strategy where you purchase both an out-of-the-money (OTM) call option and an out-of-the-money put option on the same underlying asset with the same expiration date. This strategy is particularly useful when you expect a significant price movement in the underlying asset but are uncertain about the direction of the move. Mechanics:

Purchase OTM Call Option

Buy a call option with a strike price higher than the current market price of the underlying asset.

Purchase OTM Put Option

Buy a put option with a strike price lower than the current market price of the underlying asset.

Same Expiration Date

Both options must have the same expiration date.

Let’s assume you are trading stock XYZ, which is currently priced at $100. You expect a big move due to an upcoming earnings report but are unsure whether the stock will go up or down.

Buy OTM Call Option

Strike price $110, premium $2.

Buy OTM Put Option

Strike price $90, premium $3.

Your total investment (premium) is $5 per share. The maximum loss is limited to the total premium paid for both options. In this example, that is $5 per share.

Break-even points:

Upper Break-Even

Strike price of the call + total premium paid = $\$110+\$5=\$115$.

Lower Break-Even

Strike price of the put - total premium paid = $\$90-\$5=\$85$.

The strategy becomes profitable if the stock price moves significantly beyond either break-even point.

Notice the asymmetry buried in the example: the $90 put cost $3 while the equidistant $110 call cost only $2. Black-Scholes, with its single flat volatility input, would price the two legs symmetrically; the real market does not. Out-of-the-money equity puts trade at persistently higher implied volatilities than equidistant calls — the volatility skew (or “smirk”) — because the realised behavior of equity indices is asymmetric: rallies grind, crashes gap. End investors persistently bid OTM puts for portfolio insurance and persistently sell OTM calls for yield, and the dealers in the middle charge for the imbalance. The practical consequence for a long strangle is that your downside leg is structurally more expensive than your upside leg of equivalent distance. Two corollaries follow, and it is worth being precise about which is which.

First, the corollary that does not follow: your breakevens are still exactly “strike $\pm$ total premium.” That arithmetic is exact no matter how the premium splits between the legs, so in the example above the breakevens sit at $115 and $85 — both precisely $15 from spot. Skew does not bend the breakeven formula, and you will see it claimed that it does.

What skew actually changes is strike selection. Equidistant strikes are not equal-probability strikes: because the $90 put is richer, it is also further from the money in delta terms than the $110 call. If you want a genuinely symmetric bet on magnitude, not direction, select the legs by matching delta — say 20-delta on each side — which will put the put strike further from spot than the call strike, and produce a position whose breakevens are asymmetric around spot by construction.

Second, when you are tempted by a “cheap” strangle in a quiet market, check the skew before declaring it a bargain: low at-the-money implied volatility with a steep skew means the index options market is already pricing the next gap-down, and you are paying for it whether you noticed or not.

To calculate optimal strike prices for a long strangle strategy, follow these steps:

Identify the Underlying Asset’s Current Price

Determine the current market price of the asset.

Determine the Expected Volatility

Use historical volatility or implied volatility from options pricing models like Black-Scholes.

Set the Time Horizon

Decide the expiration date of the options, typically a few months out.

Calculate the Expected Price Range

Use the formula for one standard deviation move, with volatility annualized and time to expiration in years:

$$\text{Expected Price Range}=\text{Current Price}\pm (\text{Current Price}\times \text{Volatility}\times \sqrt{\text{Time to Expiration}})$$

This is a one-standard-deviation band — under the normal approximation the underlying finishes inside it about 68% of the time.

Select Strike Prices

Use the band as a first cut: a call strike near the upper edge, a put strike near the lower. Then refine by delta, per the skew discussion above — equidistant strikes are not equal-probability strikes, so a symmetric magnitude bet means matching deltas (which pushes the put strike further from spot than the call) instead of matching distances.

Example: if the current price is $100, volatility is 20%, and the time to expiration is 3 months (0.25 years):

Start from a call near $110 and a put near $90, then let delta matching set the final strikes.

While cheaper than a straddle, the combined cost of two OTM options is still real money, and both legs decay to zero unless the move arrives. The same entry test as the straddle applies: you are betting that realized volatility will exceed what the two premiums already imply.

Best used when a significant event (earnings report, regulatory decision) is expected. The timing of the event relative to the expiration date decides the trade: if the event lands too close to expiration, there may not be enough time for the price to travel past the breakevens.