When you use the long strangle strategy in options trading, you purchase a call and a put option with different strike prices, but both options expire on the same date. If the underlying value rises, the profit on this strategy is unlimited, but it is limited until the underlying value reaches zero in the case of the put option. However, it is essential to remember that you must always deduct the initial premium paid from your profit.
A long strangle can be a profitable strategy when you expect significant price movement in the underlying asset but are uncertain about the direction. Despite this, investors tend not to use the long strangle strategy often.
A short strangle, on the other side, is an exciting strategy as you are neutral to the market when applying this strategy to a stock index. You receive a premium when setting up the strategy. As long as the underlying index/value stays within the bandwidth (sold call/sold put), you will make your maximum profit which is, in this case, the received premium of the call and put option.
The strangle can also be used when you want to open a share position and set a price for which you want to sell your shares but would not mind buying additional shares at a lower price by selling a put option.
The risk of the strangle, specifically on the index, is that you can incur unlimited losses if the option expires in the money. Therefore management is essential.
An additional fundamental rule is to stick to your size do not sell more put options than you potentially want to own stocks.