Long strangle

A long strangle has the same outlook as a long-straddle — a big move, direction unknown — but it is built differently, and the difference is money.

In a straddle both options are struck at the money. In a strangle both options are out of the money: the call is struck above the spot, the put below it. Out-of-the-money options are cheaper, so the position costs less to open.

What you give up is the gap. Between the two strikes, neither option has any intrinsic value, so the position sits at its maximum loss across a whole band of outcomes rather than at a single point. The workbook is precise about the trade-off: the outlook is the same as a straddle, but "the implementation, aggression and cost are different."

Everything follows from the strikes being apart:

• Lower cost. Two OTM premiums are smaller than two ATM premiums.
• A flat-bottomed payoff. The maximum loss is suffered anywhere between the two strikes, not at one price.
• Wider break-evens. The move needed to profit is larger, because you must clear the strike and the premium.
• Lower theta in rupees but a faster percentage burn. There is less premium to lose, and all of it is time-value — an OTM option has no intrinsic value to fall back on. A strangle that ends inside the band loses 100 per cent, where a straddle ending at the strike at least retains nothing either. Both go to zero; the strangle simply had less to start with.

The short-strangle inverts it: a maximum profit equal to the two premiums, earned anywhere between the strikes, against unlimited loss outside them. The seller's attraction is exactly that flat band — it is the widest "nothing happens" zone available from two contracts.

Cost (maximum loss) = Call premium + Put premium

Upper BEP = Call strike (higher) + Total premium
Lower BEP = Put strike  (lower)  − Total premium

Maximum loss zone = anywhere between the two strikes

A stock trades at Rs 6,100. The trader buys the 6,200 call at Rs 145 and the 6,000 put at Rs 140 — both out of the money. Assume a lot size of 100.

Total premium = 145 + 140 = Rs 285 per unit → Rs 28,500 a lot

Upper BEP = 6,200 + 285 = Rs 6,485
Lower BEP = 6,000 − 285 = Rs 5,715

The maximum loss of Rs 28,500 a lot is suffered anywhere from 6,000 to 6,200 — a 200-point dead zone, not a single price.

Set it against the straddle. The workbook's straddle on a Rs 6,000 stock cost Rs 393 and broke even at 5,607 and 6,393. This strangle costs Rs 285 — 27% less — and breaks even at 5,715 and 6,485.

Straddle: Rs 39,300 at risk, profits outside 5,607–6,393
Strangle: Rs 28,500 at risk, profits outside 5,715–6,485

Rs 10,800 less capital at risk, in exchange for a profit zone that starts further away on both sides. That is the whole choice between the two: the strangle is the cheaper ticket to a bigger move.

Chapter 17.2 works the long strangle with the 6,100 spot and the 6,200/6,000 strikes above, and states explicitly that both legs are out of the money and hence the premium paid is low. Expect a straddle-versus-strangle distinction question — the strikes — and a two-break-even computation on the strangle's wider band.

• Straddle = same strike; strangle = different strikes. That single fact carries most of the marks on this pair.
• Both strangle legs are out of the money. A call below spot and a put above it would be two ITM options and a quite different, much dearer position.
• The maximum loss covers a range, not a point. The workbook's own figure is "anywhere between 6,000 and 6,200".
• Cheaper does not mean safer. The strangle risks less money and is more likely to lose all of it.
• The upper break-even uses the call strike and the lower uses the put strike. Applying one strike to both is the standard arithmetic error.
• Both premiums go into each break-even, not just the leg on that side.