Strangle Options: How to Profit During Sharp Price Swings

Unsure about being bullish or bearish with your latest crypto options trade? Fortunately, being a crypto options trader grants you the choice of earning profits without being forced to take a side. One example of such an options strategy that takes advantage of volatility is the strangle. By taking positions on both calls and puts, crypto options traders can benefit from any large movements in the underlying asset. 

Keen to learn how to personally plan and execute such trades? From long strangle options strategies that allow you to benefit from movements on both ends of the market to short strangle options strategies that make use of upcoming volatility, here's all you need to know about trading and setting up strangles in the crypto options market.

Key Takeaways:

• Strangle options are an investment strategy consisting of two separate option contracts with different strike prices, but the same expiration date.
• The strangle options strategy allows traders to benefit from moderately volatile markets by simultaneously trading call and put options at different strike prices.
• There are two types of strangle options strategies available: long strangle and short strangle.

What Is a Strangle Option Strategy?

Strangle options are an investment strategy consisting of two separate options contracts with different strike prices but the same expiration date. This strategy allows traders to benefit from moderately volatile markets by simultaneously trading call and put options at different strike prices.

While this type of investment approach can yield substantial profits, it also carries higher risks than many other trading strategies, due to the need for accurate market timing and understanding the current sentiment.

What Is Implied Volatility?

Implied volatility (IV) is a key factor to consider when executing a strangle options strategy, as it demonstrates the amount of uncertainty or risk in the market. Implied volatility measures the expected market price movements in an options contract, and is derived from option prices themselves. It shows how much traders think an asset will move over the life of the option, which helps them to decide whether buying or selling options contracts is the right move for them when executing a strangle options strategy. In short, traders expecting more price movement in the near term should execute a long strangle strategy while traders expecting less volatility in price should write a short strangle strategy.

Types of Strangle Options Strategies

Whether you’re buying calls and puts in anticipation of significant volatility or taking advantage of the implied volatility present by writing calls and puts, the following are the differences between long and short strangle options strategies.

Long Strangle

A long strangle options strategy involves simultaneously buying call and put options with different strike prices. This strategy is predicated on the assumption that the underlying security will move significantly in either direction, resulting in a profit from one of the two positions. 

Overall, this type of investment approach carries higher risk than other strategies, since it requires precise timing to properly execute, and the belief that the high IV of the options contracts will result in a large price movement for the underlying crypto asset.

Short Strangle

Short strangles are essentially the inverse of long strangles: crypto options traders write, or sell, call and put contracts at different strike prices. This creates a situation where you’ll receive options premiums credited to your account, based on the strike prices at which you’re writing the options contracts. In order to profit from the short strangle crypto options strategy, the options premiums you’re receiving need to be greater than the overall movement of the underlying crypto asset. In other words, by applying this strategy, you’re expecting volatility to fizzle out and the price of the underlying crypto asset to be flat over time.

How Do Strangle Options Work?

Strangle options involve trading put and call options contracts at the same time. The idea for long strangles is to profit from the volatility of the underlying crypto asset by playing both sides of the market. In the case of the short strangle, traders seek to earn options premiums by writing contracts, and to profit due to a lack of price volatility.

To do this, strangle options traders need to identify two different strike prices: one higher than the current market price and one lower than the current market price. This range will then determine the strike prices at which traders will execute the strategy.

Once these strike prices have been identified, you can then buy or write both call and put options at these respective strike prices. This essentially gives you a range within which you expect the underlying asset's price to stay. If the price hovers within that range, short strangle strategy executors will rejoice — as they've managed to rake in a profit. Conversely, long strangle strategy traders will hope for the price to exceed this predetermined range in order to turn a profit.

Benefits of Using Strangle Options Strategies

Protection Against Directional Risk

Because long strangle traders are buying both call and put contracts, they’ll make money as long as the price of the underlying asset moves considerably in either direction. This reduces the directional risk that the trade will go wrong, since traders will still be able to make a profit if there’s sufficiently large movement, which reduces risk exposure in comparison to separately and exclusively buying only call or put contracts.

Affordable for Traders With Limited Access to Capital

Long strangle options are significantly more affordable than other options strategies, and are designed for options traders with limited access to capital. This is due to the strangle strategy's preference for out-of-the-money options, which have lower baked-in premiums than at-the-money options that possess higher intrinsic value.

Increased Liquidity From Credited Option Premiums

If you're an active crypto trader, you'll definitely appreciate the added liquidity that comes from writing crypto options contracts. By writing call and put contracts, you'll now have access to these funds, which can then be used to generate additional yield. Whether you're utilizing them to trade on additional leverage, or putting them to work by generating passive yield in a staking pool, traders writing short strangle options can definitely get more bang for their buck thanks to this strategy.

Risks of Using Strangle Options Strategies

Unlimited Risk for Short Strangles

Since you’re writing call and put crypto options contracts when executing a short strangle, theoretically your potential losses could be considered unlimited, especially on the written call option side of things. If the price exceeds the strike price of the written call, a trader will be forced to buy the underlying asset. They must then sell it at the strike price to the trader who had bought that written call. 

For example, let's say you were to write a short strangle for BTC, with the written call having a strike price of $33,000. If the price of BTC blows past $33,000 and soars to $40,000 at the time of expiry, then traders who wrote this call option will have to fork out an additional $7,000. This is because not owning the underlying BTC would force you to purchase said BTC at $40,000 and sell it to the BTC call buyer at $33,000.

As for the risks concerning the written put, crypto options traders must simply have enough to purchase the underlying crypto at the indicated strike price. This is because if the price falls below the strike price of the written put, you would own the underlying asset at the strike price at which the put was sold. 

Referring back to our aforementioned BTC short strange example, let's go with BTC falling to $25,000 at the time of expiry and you writing a put contract with a strike price of $30,000. This would force you to purchase 1 BTC at $30,000. In this sense, your losses can be considered unlimited as your cost price is now $30,000, regardless of what happens to the price of Bitcoin thereafter the option expires.

By these definitions and examples listed above, losses can be considered limitless as BTC can soar above or plunge below the strike prices of the contracts you've written. This risk of unlimited losses is often why crypto options traders tend to further hedge by purchasing out-of-the-money call and put options, transforming the strategy into an iron condor options strategy.

Low Odds of Success for Long Strangles

Contrary to popular belief, more than half of out-of-the-money options expire worthless. This makes it all the more difficult for inexperienced long strangle options traders to profit, given how such options are the basis for the strategy. 

While the odds for success do increase, the more familiar the options trader is with timing the strategy and gauging existing implied volatility, it's certainly still a risk, considering the complexity of the strategy and how beginners may get left behind.

Strangle Options Strategy vs. Straddle Options Strategy

If you’re new to crypto options trading, you might confuse the strangle strategy with the straddle strategy. These two options strategies are similar in that each one involves writing two contracts, one at a put strike price and one at a call strike price. 

However, the key difference between the two is that with the strangle strategy, you’ll choose two prices that are at a range and further apart than what you would choose for a straddle strategy, which involves trading calls and puts at the same strike price. This means that while the strangle strategy gives you more potential reward, due to the larger distance between the contracts, it also has a greater risk because of the greater exposure to higher volatility in either direction. 

Ultimately, when deciding which approach is best for your own trading objectives, consider how much risk you're willing to take on, and how much reward you expect in exchange for that risk.

How to Set Up the Strangle Options Strategy

Thanks to volatility, the strangle options strategy is one of the most popular methods for traders looking to make a profit with options. 

In this example, let's take a look at Bitcoin options contracts and run a long strangle strategy, because we're expecting there to be a greater upcoming price movement than what's accounted for with the current implied volatility stated in the calls and puts contracts. 

With BTC prices at $30,000, we can run a long strangle by purchasing both a call contract and a put contract that are expiring in a month. Specifically, we can consider the 33000C and 27000p contracts expiring on Aug 25, 2023, with strike prices that are out-of-the-money by about 10% from the reference price of BTC. By executing this long strategy, you’ll be paying a total of 0.0194BTC, which is the equivalent of $582 worth of premiums.

Is the Strangle Options Strategy Worth Trying?

The strangle options strategy is a useful tool for both beginning and experienced traders. For beginners, the strangle options strategy helps reduce directional risk, since traders will have exposure to both sides, regardless of whether the price of the underlying asset goes up or down. Novice traders can also make excessive profits if the underlying asset moves far enough in either direction. 

Experienced traders, on the other hand, can use this strategy to capitalize on larger price movements in order to gain bigger profits because of the baked-in implied volatility. However, it’s important to remember that taking on higher levels of risk means greater potential losses as well as rewards, so traders must carefully consider their risk appetite before deciding which options strategies are suitable for them.

The Bottom Line

In order for crypto options traders to successfully profit from strangle options, it's essential to understand the basics of implied volatility and how that acts like a coiled spring, possibly causing a large movement in prices. From using long strangles to play the ramp-up in volatility, to writing short strangles to profit off expected price movements, we hope our guide has been helpful for you in understanding the basics of trading strangle options strategies.

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