Profiting From a Large Move

What Is a Long Strangle?

A Long Strangle involves buying two options:

• Buy 1 OTM Call
• Buy 1 OTM Put

Both options have:

• The same underlying
• The same expiry
• Different strike prices

The Call is purchased above the current market price, while the Put is purchased below the current market price.

The strategy is therefore suitable when you expect significant volatility but do not know which direction the market will take.

Long Straddle vs Long Strangle

The two strategies are closely related.

Long Straddle

Buy ATM Call + Buy ATM Put

Long Strangle

Buy OTM Call + Buy OTM Put

The main difference is the strike selection.

The Long Strangle therefore trades a lower initial cost for a higher movement requirement.

Why Use OTM Options?

The main attraction is cost.

ATM options generally have higher premiums because they have a greater probability of finishing ITM.

OTM options are cheaper.

Therefore, instead of paying for an ATM Call and ATM Put, the trader buys:

• A cheaper OTM Call
• A cheaper OTM Put

The total premium paid is therefore usually lower than that of a Straddle.

But this comes with an important trade-off.

The underlying has to move farther before either option generates enough value to cover the total premium paid.

A Practical Example

Suppose the underlying is trading around ₹7,800.

You expect a large move but do not know the direction.

You construct a Long Strangle by:

• Buying 7,900 CE
• Buying 7,700 PE

Assume:

• 7,900 CE premium = ₹60
• 7,700 PE premium = ₹50

Therefore:

Total Premium Paid = ₹60 + ₹50

= ₹110

The ₹110 represents the total cost of establishing the position.

What Happens If the Market Rises Sharply?

Suppose the underlying rises significantly above the Call strike.

The 7,900 CE begins gaining intrinsic value.

The 7,700 PE may expire worthless.

The Call eventually needs to recover the entire ₹110 premium paid for the strategy.

Once it does, the position reaches its upper breakeven.

Any further rise can generate profit.

Because the underlying can theoretically continue rising, the upside profit potential is unlimited.

What Happens If the Market Falls Sharply?

Now consider a significant decline.

The 7,700 PE becomes increasingly valuable.

The 7,900 CE may expire worthless.

Once the Put gains enough to recover the ₹110 total premium, the strategy reaches its lower breakeven.

Any further decline can generate profit.

Therefore:

Sharp rise → Profit

Sharp fall → Profit

Small movement → Loss

This is the defining characteristic of the Long Strangle.

What Happens If the Market Barely Moves?

Suppose the underlying remains between the two strikes.

At expiry:

• The OTM Call can expire worthless.
• The OTM Put can also expire worthless.

The trader loses the entire premium paid.

Therefore:

Maximum Loss = Total Premium Paid

In our example:

Maximum Loss = ₹110

This loss is limited and known when the position is established.

The Two Breakeven Points

The Long Strangle has two breakeven levels.

Upper Breakeven

Call Strike + Total Premium Paid

Using the example:

₹7,900 + ₹110 = ₹8,010

Therefore, the upper breakeven is ₹8,010.

Lower Breakeven

Put Strike − Total Premium Paid

Therefore:

₹7,700 − ₹110 = ₹7,590

So the lower breakeven is ₹7,590.

Understanding the Three Payoff Zones

The position can be divided into three broad areas.

Below the Lower Breakeven

The Put gains more than the total premium paid.

Profit

Between the Two Breakevens

The movement is not large enough to recover the total premium.

Loss

Above the Upper Breakeven

The Call gains more than the total premium paid.

Profit

So the Long Strangle has a payoff that resembles a wide V-shape.

Why Does It Need a Larger Move Than a Straddle?

This is one of the most important differences between the two strategies.

Suppose the underlying is at ₹7,800.

With a Straddle, you might buy:

• 7,800 CE
• 7,800 PE

Both options are ATM.

With a Strangle, you might buy:

• 7,900 CE
• 7,700 PE

The Call needs the underlying to rise above ₹7,900 before it even becomes ITM.

The Put needs the underlying to fall below ₹7,700 before it becomes ITM.

Therefore, the market has to travel farther before either option starts generating intrinsic value.

This is why the Strangle generally requires a larger price movement than a Straddle.

The Trade-Off

The Long Strangle can therefore be understood through one simple trade-off:

Lower cost, but a larger movement is required.

Long Straddle

Higher premium
→ Lower movement required

Long Strangle

Lower premium
→ Higher movement required

Neither is automatically better.

The choice depends on how large a move you expect and how much premium you are willing to pay.

When Can a Long Strangle Be Useful?

A Long Strangle can be considered when:

• You expect significant volatility.
• You cannot confidently predict the direction.
• You expect the movement to be larger than the combined distance to the selected strikes and premiums.
• You want to reduce the upfront cost compared with a Straddle.
• You believe a major event could cause a substantial price movement.

The key requirement is that the expected movement should be large enough to cross a breakeven level.

Volatility Matters

A Long Strangle involves buying two options.

Therefore, changes in implied volatility can have a significant impact on the position.

Generally, the strategy is more attractive when options are purchased at relatively lower implied volatility.

If volatility rises after the position is established, the premiums of the long Call and Put can increase.

This can benefit the strategy even before expiry.

However, buying the Strangle when implied volatility is already extremely high can create a significant risk.

If volatility subsequently falls, both options can lose value.

The Risk of Volatility Falling

Consider a major event.

The market expects a large move, so traders bid up option premiums.

You purchase an OTM Call and OTM Put.

The event occurs.

But the actual result is broadly in line with expectations.

The market barely moves.

At the same time, the uncertainty surrounding the event disappears.

Implied volatility falls.

Now both options can lose value quickly.

The trader can therefore suffer a loss even though the strategy was based on a reasonable expectation of uncertainty.

This is commonly referred to as a volatility crush.

Why the Size of the Expected Move Matters

Suppose the total premium paid is ₹110.

The market must move sufficiently far to recover that ₹110.

If the market moves only slightly:

Premium paid > Option gains

Result:

Loss

If the market makes a large enough move:

Option gains > Premium paid

Result:

Profit

Therefore, before entering the trade, compare:

Expected Move

with

Total Premium + Distance to Strike

This helps determine whether the strategy has a reasonable chance of reaching a breakeven level.

Long Strangle and Event Trading

The strategy can be relevant around events such as:

• Corporate results
• Major announcements
• Regulatory developments
• Important economic events
• Other situations where a large price reaction is expected

But the event itself is not enough.

The expected movement should be large enough to justify the premiums being paid.

If the market has already priced in a very large movement, the options may already be expensive.

Therefore, the trader should compare the expected move with the option premiums rather than assuming that an event automatically favours a Long Strangle.

A Simple Decision Framework

Before considering the strategy, ask four questions:

1. Do I expect a large move?

If not, a Long Strangle may not be appropriate.

2. Am I uncertain about the direction?

If you have a strong directional view, another strategy may be more suitable.

3. Are the option premiums reasonable?

If implied volatility is already extremely high, the strategy may become expensive.

4. Can the expected move cross a breakeven?

This is critical.

The expected movement should be compared with both breakeven levels.

Long Strangle vs Long Straddle

The difference can be remembered very simply:

Straddle = Same Strike

Strangle = Different Strikes

A Straddle buys ATM options at the same strike.

A Strangle buys OTM options at different strikes.

Therefore:

Straddle → More expensive, lower movement requirement

Strangle → Cheaper, higher movement requirement

Key Takeaways

1. A Long Strangle is a market-neutral strategy designed to benefit from a large move in either direction.
2. It involves:
   • Buying an OTM Call
   • Buying an OTM Put
3. Both options have the same underlying and expiry, but different strikes.
4. The strategy generally costs less than a Long Straddle because OTM options are cheaper.
5. The trade-off is that the market needs to make a larger move to become profitable.
6. Maximum Loss = Total Premium Paid.
7. Upper Breakeven = Call Strike + Total Premium Paid.
8. Lower Breakeven = Put Strike − Total Premium Paid.
9. A sharp rise can generate unlimited upside profit potential.
10. A sharp fall can generate substantial downside profit.
11. A small movement between the breakeven levels results in a loss.
12. Lower volatility at entry and a subsequent rise in volatility can generally benefit the strategy.
13. Buying options when implied volatility is already very high creates the risk of a volatility crush.
14. Before entering the position, compare the expected market move with the total premium and breakeven levels.
15. The simplest distinction to remember is: Straddle = same strike; Strangle = different strikes.