Strangle.
In plain English
A long strangle buys an out-of-the-money call above the current price and an out-of-the-money put below it, both expiring on the same date. Because both contracts start with no intrinsic value, the combined premium is lower than a straddle at the same expiration. The trade-off is a wider gap the stock must cross before either side pays. If the stock finishes between the two strikes at expiration, both contracts expire worthless and the full premium is lost. The position gains value when expected volatility rises, and loses it steadily when the market stays calm.
01Why it matters
The lower cost compared with a straddle is not a discount, it is payment for a narrower range of outcomes where the position works at all.
02The math, step by step
With a stock at $100, a $110 call costs $1.50 and a $90 put costs $1.50, a total of $3. The position breaks even at $113 or $87. Anywhere between $90 and $110 at expiration and the entire $300 on one contract pair is gone.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
A straddle shares one strike, usually near the current price, and costs more because both contracts start with real value. A strangle spreads the strikes apart and costs less, but the stock has to travel further before anything is recovered.
04Receipts
Every figure on this page is sourced to a primary document. Tap to open the original.
Plain-English answers from our glossary. Receipts included. Never advice.
Educational tool. Answers come only from ClearMoneySchool's published glossary and are not advice. Why we never give advice