A strangle option is a pair of option contracts that are designed to bring the trader profit based on the amount of a price move and not the direction of a price move.  With a standard option contract, the strike price is set and the trader profits based on whether he or she buys a put and the price rises or buys a call and the price falls. In this case, profit is made both on the amount and the direction of the price move.

With a strangle option strategy, two options contracts are purchased with different strike prices positioned to allow the trader to profit whether the underlying stock price rises or falls.  There are several different types of option strangle strategy methods depending on whether you’re long or short in the option contract.

Long Strangle Option
A long strangle is when you buy both a put option and a call option on the same stock.  Both of these options contracts expire at the same time but their strike prices are different.  The trader has to pay the premium for both contracts which automatically puts him in the hole but, if the underlying stock prices either rises above the call option’s strike price or falls below the put option’s strike price by enough to cover the cost of both strangle premiums then he profits.

Short Strangle Option
In contrast to a long strangle option, a short options strangle is a strategy designed to bring profit when the price of the underlying stock shows little volatility.  For a short strangle option, a call and put option are sold on the same stock with the same expiration dates but different strike prices on either side of the current market price of the stock.  As long as the stock price stays between the strike prices until the contracts expire, the trader will profit the sum of the two premiums she received for opening the positions.

But, unlike a long strangle option where the downside is limited to only the premiums paid, for a short strangle option the downside is theoretically infinite if the underlying stock becomes volatile and rises significantly above the upper strike price or significantly below the lower strike price.

In either case, a strangle option is designed around buying or selling a put and call option with the same expiration dates but different strike prices that “strangle” or surround the current market price of the stock.  In the case of a long strangle option, the maximum profit is made when the underlying stock moves far enough above or below the surrounding strike prices to overcome the premium paid to enter the trade while, for a short strangle option, the maximum profit is made when the underlying stock price stays between the strike prices.

Like many option strategies, the strangle option offers much more risk when you go short vs. when you go long.  Short contracts offer a fixed maximum potential for profit which can quickly erode and cause losses that can theoretically be infinite if the underlying stock price continues to rise or fall.  The long strangle option starts with a pair of strangle premium costs to overcome but, after the stock price rises or falls enough to make up for those premiums, further price moves in the strangle option is pure profit.