The wide variety of option trading strategies is what makes options trading so incredibly powerful.

The long strangle is one of my favorite option trading strategies

This strategy differs from a straddle in that the call strike is above the put strike. As a general rule, both the call and the put are out-of-the-money. Strangles are less expensive than straddles, but a larger move in the underlying stock is generally required to reach breakeven.

The primary reason I like the options trading strategies known as  long strangles is that your downside is limited. The greatest loss occurs if the underlying stock remains between the strike prices until expiration. If at expiration the stock’s price is between the strikes, both options will expire worthless and the entire premium paid will have been lost.

While at the same time the maximum gain is unlimited. The greatest gain occurs if the underlying stock goes to infinity, and a very extensive gain would occur if the stock became valueless. The gross profit at expiration would be the difference between the stock’s price and either the call strike price if the stock price is superior or the put strike price if the stock price is inferior. The net profit is the gross profit less the premium paid for the options. There is no limit to the upside potential and the downside potential is limited only because the stock price cannot go below zero.

The possible profit is infinite on the upside and very substantial on the downside. The loss is limited to the premium paid for the options.

This tactic breaks even if, at expiration, the stock price is either higher than the call strike price or lower than the put strike price by the total of premium paid. At either of those levels, one option’s intrinsic value will equal the premium paid for both options while the other option will be dying valueless.

Upside breakeven = call strike + premiums paid

Downside breakeven = put strike – premiums paid