What it is
You buy two options with one expiry: a put with its strike under the current price, and a call with its strike over it. Both start out of the money, so together they cost less than buying the two at the current price. The total paid is the most the trade can lose.
What has to happen for it to make money
The stock has to travel past one of the strikes by more than the total paid, up or down, by expiry. Anywhere from the lower strike to the upper one, neither option is worth anything at expiry, and that whole stretch is the maximum loss, not a single price. Beyond either break-even the gain grows with the move, without a limit on the upside.
Compared with a straddle it trades a lower cost for a wider dead zone: the ticket is cheaper, but the stock has to go further before either side is worth anything. Rising volatility helps it before expiry, because options far from the money gain proportionally the most when the market starts expecting larger moves.
Once it is on
Both options decay every day the stock stays between the strikes, and because they are out of the money their value is all time value, which drains faster near the end. Buyers usually set an exit date, often just after the event they bought it for, rather than hold to expiry hoping for a late move. If the stock moves sharply one way, the losing side can be sold for whatever it still fetches, recovering part of the cost.
What goes wrong
A move that is real but not big enough. A stock that rises or falls to just past a strike, but not past the break-even, still loses money, which is the frustrating case: right about the direction of travel and wrong about the distance.
The volatility crush. Ahead of a known event both options are priced for a large move. Once it passes, their value can drop sharply even if the stock moved, leaving the strangle worth less than its cost.
Pros and cons
- Pro: cheaper than a straddle on the same stock.
- Pro: the cost is the entire risk.
- Pro: pays on a large move in either direction.
- Con: needs a bigger move than a straddle to pay.
- Con: the whole range between the strikes is a full loss.
- Con: all of its value is time value, which decays.
In Restrike
The two bought options are kept as separate rows on the Log, recorded in dollars and counted in the win rate once closed. Labelling both with one strategy name groups them on the scorecards. Restrike reads them read-only from your broker and never places a trade.