Long Strangle

Components

Long one OTM Call
Long one OTM Put

Long one put option with a lower strike price and long one call option at a higher strike price.

Risk / Reward

Maximum Loss: Limited to the total premium paid for the call and put options.

Maximum Gain: Unlimited as the market moves in either direction.

Characteristics

When to use: When you are bullish on volatility but are unsure of market direction.

A long strangle is similar to a straddle except the strike prices are further apart, which lowers the cost of putting on the spread but also widens the gap needed for the market to rise/fall beyond in order to be profitable.

Like long straddles, buying strangles is best when implied volatility is low or you expect a large movement of market price in either direction.