What is a strangle?
In one line: A strangle is a call and a put on the same stock and expiry at two different strikes, usually both out of the money. Sold together they collect a premium; bought together they pay for a big move either way.
How it works
A strangle is two options on the same stock with the same Expiration date, at two different strikes. A Call option above the stock price and a Put option below it.
Sell both and you have a short strangle: you collect a premium and you want the stock to sit still. Buy both and you have a long strangle: you pay a premium and you want a big move, either direction.
The gap between the strikes is the whole point. A Straddle puts both legs at the same strike. A strangle spreads them apart, which widens the quiet range and shrinks the premium.
An example (hypothetical)
An illustration, not a trade idea. Made-up company Northwind Freight trades at $50. Both options expire on the same date.
- Sell the $45 put for $1.00.
- Sell the $55 call for $1.00.
Total credit: $2.00, or $200 for one strangle.
Break-evens use the total credit, not each leg's: $45 − $2.00 = $43.00 below, and $55 + $2.00 = $57.00 above.
| Northwind at expiry | Result per strangle |
|---|---|
| $45 to $55 | Both expire. +$200 (max gain) |
| $43 or $57 | Break-even. $0 |
| $40 | Put worth $5. −$300 |
| $60 | Call worth $5. −$300 |
| $35 | Put worth $10. −$800 |
Past a break-even the loss grows dollar for dollar. At $35 that is $8 past $43, so $800.
Why it matters for sellers
A short strangle pays twice for the same quiet market, so the credit is bigger than one Cash-secured put alone. It also doubles the ways to be wrong.
- The call side is uncovered unless you hold 100 shares. The loss above the strike has no ceiling.
- The put side ties up cash if you intend to buy the shares, the same as on the wheel strategy.
- Brokers set a high options approval level for uncovered writing, and in Canada a TFSA or RRSP generally will not allow it — check your broker's current rules.
If you want the same range with a floor under the loss, an Iron condor buys wings on both sides. The map of these choices is in option strategies beyond the wheel.
A common mistake
Treating the gap between the strikes as protection. It is not a wall, it is a head start. Widening the strikes from $45/$55 to $40/$60 might halve the credit while the stock can still travel either way on one piece of news.
The other mistake is arithmetic: working a break-even from one leg's premium. Both credits defend both sides, so both go into both break-evens.
Questions
What is the difference between a strangle and a straddle?
The strikes. A straddle uses one strike for the call and the put. A strangle uses two different strikes, normally one above and one below the stock price.
Can a short strangle lose more than the premium?
Yes, by a lot. The example collects $200 and is down $800 at $35. Size the trade on a bad move, not on the credit.
Why would anyone buy a strangle instead of a straddle?
It costs less, because both legs start out of the money. The trade-off is that the stock has to travel further before the position is worth anything.
Does a short strangle need 100 shares?
Only the call side would be covered by shares. Without them that leg is uncovered, which most brokers gate behind their highest options approval level.
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