While the long strangle has theoretically unlimited profit potential and limited risk, it should not be viewed as a low-risk strategy. Options can lose their value very quickly, and in the case of a strangle, there is a substantial amount of erosion of time value relative to the simple purchase of a put or call.

The opposite of a long strangle is a short strangle. This position has unlimited risk and limited profit potential, and is therefore only appropriate for experienced investors with a high tolerance for risk. The short strangle will profit from limited stock movement and will suffer losses if the underlying stock moves substantially in either direction.

In a short strangle an investor would write an out-of-the-money put and call of the same month and underlying stock. To the right you will see examples of strangles. These strategies may require higher commissions since they involve buying or selling multiple positions. Both examples are exclusive of commissions, interest and dividends.

The most that can be lost in the first example is the amount paid, or $375. The potential profit is unlimited. For every point XYZ moves above 58.75 or below 41.25 this position will profit $100.

In the second example, the maximum profit is the premium received, or $375. The maximum loss is unlimited, and the position will lose $100 for every point that XYZ moves above 58.75 or below 41.25.

The margin for buying a strangle is 100% of the price paid. The margin for selling a strangle is the margin on the short call plus the margin on the short put. There is also a minimum margin of $500 per uncovered short option. Furthermore, Mr. Stock requires account equity of at least $25,000 at the time of writing any uncovered calls.

The graphs show the profit/loss performance of strangles. The risk profiles of long and short strangles are mirror images of each other. Both graphs assume theoretical profit or loss at expiration excluding commissions, interest and dividends. Graphs are not drawn to scale.

A long straddle is an option strategy in which a call and a put of the same strike, month and underlying terms are purchased. This position is called a straddle since it will profit from a substantial change in the stock price in either direction. While the long straddle has theoretically unlimited profit potential and limited risk, it should not be viewed as a low-risk strategy.

Options can lose their value very quickly, and in the case of a straddle, there is twice the amount of erosion of time value as compared to the purchase of a put or call. The opposite of a long straddle is the short straddle. This position has unlimited risk and limited profit potential, and is therefore only appropriate for the experienced investor with a high tolerance for risk. The short straddle will profit from limited stock movement and will suffer losses if the underlying stock moves substantially in either direction. Both long and short straddles may require higher commissions since they involve buying or selling multiple positions.

Take a look at the examples above (both examples are exclusive of commissions, interest and dividends). The most that can be lost in the first example is the amount paid, or $870. The potential profit is unlimited. For every point XYZ moves above 63.70 or below 46.30, this position will profit $100.

In the second example of selling a straddle, the maximum profit is the premium received, or $870. The maximum loss is unlimited, and the position will lose $100 for every point that XYZ moves above 63.70 or below 46.30.

The margin for buying the straddle is 100% of the price paid. The margin for selling the straddle is 25% of the underlying stock price plus the premium received. There is a minimum margin of $1,000 per short straddle. Mr. Stock also requires account equity of at least $25,000 at the time of writing any uncovered calls.

Risk Profile Graphs

The graphs show the profit/loss performance of straddles. The risk profiles of long and short straddles are mirror images of each other. Both graphs assume theoretical profit or loss at expiration excluding commissions, interest and dividends. Graphs are not drawn to scale.