The Long Strangle is a Option strategyThe trader can use this to react to a strong movement in the underlying (regardless of direction) and/or a rise in the implied volatility can speculate. In contrast to a short strangle or a long straddle, the Long Strangle used somewhat less frequently by option traders.
Definition Long Strangle
A long strangle consists of a purchased Out Of The Money Call option (Long Call) and a purchased Out Of The Money Put option (long put) with the same maturity.
The trade makes a profit when there is a strong movement in the underlying and/or a sharp increase in implied volatility.
P&L diagram of a long strand
The P&L diagram shows the profit or loss of the long strangle on the expiration date. The maximum loss occurs when the underlying is between the two strike prices of the purchased Options quoted. If a movement is made above one of these price levels, the loss is reduced or the profit increased the further the underlying rises or falls.
What should I pay attention to when trading a long strangle?
For a long strangle to generate a profit, the underlying must rise far above the strike price of the long call or fall below the strike price of the long put by the expiration date. Since the vega is positive due to the two purchased options, the long strangle reacts sensitively to changes in implied volatility during the term.
Maximum loss
The maximum possible loss of a long strangle is limited to the number of strangles paid Option premium of the two options (net debit) is limited and arises if the underlying is quoted below the price level of the long call and at the same time above the price level of the long put on the expiration date.
Maximum and realized profit
The maximum profit of a Long Strangle is not definedsince the underlying can theoretically rise indefinitely or fall to zero. The actual profit on the expiration date can be calculated by calculating the difference between the price of the underlying and the strike price of the call or put and then subtracting the option premium paid (net debit).
Profit = Price underlying - strike price long call - net debit
Or:
Profit = strike price long put - price underlying - net debit
Break Even Points
The two break even points of a long strike can be calculated by adding the option premium paid (net debit) to the strike price of the long call or subtracting it from the strike price of the long put.
Break Even Point (1) = Base Price Long + Net Debit
Break Even Point (2) = strike price long put - net debit