Long Strangle
Definition : Buying one call and one put in the same option class, in the
same expiration cycle, but with different strike prices. Typical long
strangles involve an OTM call and an OTM put. A strangle in which an
ITM call and an ITM put are purchased is called a long guts strangle.
A long strangle is similar to a long straddle in many ways. They both
require buying a call and a put on the same class in the same expiration
month. They are both buying volatility. There are, however, some functional
differences. These differences stem from the fact that the options have
different strike prices.
Because there is distance between the strike prices, from an at-expiration
perspective, the underlying must move more for the trade to show a profit.
Exhibit 15.8 illustrates the payout of options as part of a long strangle on
a $70 stock. The graph is much like that of Exhibit 15.1 , which shows the
payout of a long straddle. But the net cost here is only 1.00, compared with
4.25 for the straddle with the same time and volatility inputs. The cost is
lower because this trade consists of OTM options instead of ATM options.
The breakdown is as follows: