Strangle
A strangle involves holding a call and a put option at different strike prices — both out-of-the-money — on the same underlying and expiry. Compared to a straddle, a strangle costs less to establish but requires a larger move in the underlying to become profitable.
In a long strangle, the call strike is above the current market price and the put strike is below it. The total premium paid is lower than a straddle because both options are out-of-the-money and carry only time value. The trade-off is a wider break-even range: the underlying must surpass the call strike plus combined premium on the upside, or fall below the put strike minus combined premium on the downside.
Nifty and Bank Nifty strangles were commonly discussed in the context of monthly expiry cycles on NSE, where the wider time horizon gave the underlying more opportunity to make the required move. Weekly strangles were used by more active participants who sought to capture short-term volatility events with limited capital outlay.
Short strangles involve writing both OTM calls and OTM puts, collecting the combined premium. The strategy profits if the underlying stays within the range defined by the two strikes plus or minus the premiums. Short strangles on Nifty were used by premium sellers who sought a wider profit zone than a short straddle at the cost of collecting less total premium. The gamma risk on a short strangle is lower than a short straddle near expiry because the written strikes are further from the current price.
A practical consideration in Indian markets is the liquidity of OTM strikes. While near-ATM OTM options had reasonable liquidity, far OTM strikes — particularly useful for wide strangles — sometimes had wide bid-ask spreads and limited open interest, making it difficult to enter and exit positions at fair prices. Participants in Bank Nifty weekly options sometimes accepted wider slippage on the OTM legs of strangles due to this illiquidity.
A misconception is that the lower cost of a strangle relative to a straddle makes it more efficient. The strangle requires a larger absolute move to break even and has a lower probability of profitability at expiry because both legs are OTM. The choice between straddle and strangle depends on the expected magnitude of the move, the available premium budget, and the participant's assessment of the likely range.