Strangle Option Spread

The strangle option spread is a risky strategy with high rewards that can be used to profit if a stock makes a big enough move in either direction.

The strategy involves buying an out of the money call option and an out of the money put option on the same stock. The trade will be profitable if the stock makes a big enough move in either direction.

Max Profit

The most you could possibly make from a trade like this is infinite. As long as the stock moves high enough there is no limit to how much you could potentially make by entering these trades.

If the stock price moves lower than the most you could possible make would be the strike price of the put that you own. For instance if you own a $40 put on a stock the most you could make is $40 because the lowest price the stock can go to is $0.

Max Loss

The strangle option spread is able to limit your loss to what you paid for the OTM call and the OTM put. You cannot lose anymore then you put into it which is why aggressive traders might use this approach to trade for higher returns with their risky money that they do not mind losing.

Probability

Both the Straddle and Strangle are high risk high return option trading strategies because the stock has to move a lot in order for it to be profitable. As a result it is best done only with money that you can afford to lose, because you may end up losing it.

This strategy is a little riskier then the Straddle because the options you are buying are OTM. However it does have a higher reward potential as well.

It may be a higher probability trade then simply buying a call or a put on a stock that you think will make a big move in the near future because as long as the stock moves massively in one direction or another you can make money from it.

If the stock only moves slightly in one direction or another then a loss in one section of the spread may be slightly offset by a gain in another section of the spread.