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In [[finance]], a '''strangle''' is an [[investment strategy]] involving the purchase or sale of particular [[option (finance)|option]] [[derivative (finance)|derivatives]] that allows the holder to profit based on how much the price of the [[underlying]] security moves, with relatively minimal exposure to the ''direction'' of price movement. The purchase of particular option derivatives is known as a long strangle, while the sale of the option derivatives is known as a short strangle. It is related to a similar option strategy known as a [[straddle]].

==Long strangle==
[[File:Long strangle option.svg|thumb|325px|Payoffs of buying a strangle spread.]]
The '''long strangle''' involves going long (buying) both a [[call option]] and a [[put option]] of the same underlying security. Like a [[straddle]], the options expire at the same time, but unlike a straddle, the options have different [[strike price]]s. A strangle can be less expensive than a straddle if the strike prices are out-of-the-money.  The owner of a long strangle makes a profit if the underlying price moves far enough away from the current price, either above or below. Thus, an investor may take a long strangle position if he thinks the underlying security is highly [[Volatility (finance)|volatile]], but does not know which direction it is going to move. This position is a limited risk, since the most a purchaser may lose is the cost of both options. At the same time, there is unlimited profit potential.<ref>{{cite book |title=The Complete Idiot's Guide to Options and Futures |last=Barrie |first=Scott |year=2001 |publisher=Alpha Books |isbn=0-02-864138-8 |pages=120–121 }}</ref>
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== Short strangle ==
[[File:Short strangle option.svg|thumb|248px|payoff of short strangle]]
The '''short strangle''' involves shorting (selling) both a [[call option]] and a [[put option]] of the same underlying security. Like a [[straddle|short straddle]], the options expire at the same time, but unlike a straddle, the options have different [[strike price]]s. The premium can be chosen by the short party, with the hope that this will cover any potential volatility.  The short party of the strangle makes a profit if the underlying price stays within the boundaries of the strike price of which they would be exercised, either above or below. Thus, an investor may take a short strangle position if he thinks the underlying security is not at all [[Volatility (finance)|volatile]]. This position has limited profit and unlimited risk. A long iron condor is similar, but due to the wings it has limited downside.

==Strangle Premium==
In FX options trading people sometimes talk about the ''strangle premium''. It indicates how much above the at-the-money volatility the two out-of-the-money strangle volatilities are. 
The strangle premium is a measure of the curvature of the volatility smile. Mathematically, for a given maturity, the 25 strangle premium is:
:<math>S_{25} = \sigma_{put,25} - 2 \sigma_{atmf} + \sigma_{call,25} </math>
where <math>\sigma_{put,25}</math> is the volatility of the put with the strike chosen to give a delta of -25%.<br>
<math>\sigma_{call,25}</math> is the volatility of the call with the strike chosen to give a delta of 25%.<br>
and <math>\sigma_{atmf}</math> is the volatility of call with strike set to the forward.

==References==
{{Reflist}}

==External links==

{{Derivatives market}}

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[[Category:Options (finance)]]
[[Category:Derivatives (finance)]]