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Seasoned VeteransVolatile (direction unknown)
Long Strangle
Overview
Similar to a straddle but using out-of-the-money options (lower cost). You buy an OTM call and an OTM put. Cheaper than a straddle but requires a larger move to profit.
Max Profit
Unlimited on upside, substantial on downside
Max Loss
Total premium paid (less than straddle)
Breakeven
Call strike + total premium OR Put strike - total premium
Structure
Long 1 OTM Call + Long 1 OTM Put (different strikes, same expiry)
Risk Profile
Unlimited profit potential. Risk limited to total premium. Requires larger move than straddle to profit.
When to Use
When you expect a big move but are unsure of direction. When you want a cheaper alternative to a straddle. Before major catalyst events.