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Glossary of Terms and Strategies for Options Trading
Complete Options Glossary: Strategies, Terms, Greeks, and Option Selling Techniques. Clear, concise, and suitable for both beginners and advanced traders. Learn to trade options effectively.
Strategy
Advanced, Speculation
Strangle
Buying an OTM call and put to profit from a large price move in either direction.
Detail
A Strangle is an options strategy where we buy an out-of-the-money (OTM) call and a put with different strikes but the same expiration. The goal is the same as a Straddle – to profit from a large movement in the underlying, but the entry is cheaper because both options are OTM. It requires a larger movement in the underlying than a Straddle to make a profit due to the lower delta.
Strangle is ideal for situations where a large move is expected but we don't want to invest as much as with a Straddle. Because we are buying an OTM option, the entry is cheaper, but the underlying must make a larger or faster move to cover the potential decay of the higher time component of the option value and because of the lower delta. It is speculation on "unexpected" moves.
Optimal conditions
Expected significant movement, lower IV at entry (cheaper option).
Max profit
Unlimited when the underlying rises, very high when it falls (limited by the zero price of the underlying).
Max loss
Limited to the premium paid (OTM call price + OTM put price).
Risks
Loss if the underlying remains between strikes. Higher required movement than Straddle. Negative Theta (time value decreases).
Greeks
Delta neutral at opening, Theta negative, Vega positive.
Variations
Short Strangle (list of both options – very risky), Wide/Narrow Strangle (depending on strike distance).
Usage example
I expect a big move on ABC stock. We will buy a put strike 90 and a call strike 110, both expiring in 30 days. Total premium $300. We need a big move to make a profit.
DTE
Usually short-term (7–30 days), for quick movement.
IV (implied volatility)
It is advisable to enter at low IV, profit at increasing IV or large movement.
Premium
Debit position
Margin
No additional margin, premium is paid for entry.
Notes
Suitable for expecting large movements at a lower price than Straddle. Requires a larger movement of the underlying to make a profit due to lower delta.
Tags
strangle, option strategy, big move, volatility, buying OTM call and put, earnings, IV
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