A strangle is an options strategy that involves purchasing both a call option and a put option with different strike prices but the same expiration date. This strategy is used when an investor believes that the stock price will experience significant movement but is uncertain about the direction of the movement.
For example, let’s say Company XYZ is set to release its quarterly earnings report, and you believe that the stock price will experience a significant movement following the release, but you are not sure whether it will go up or down. You could implement a strangle strategy by purchasing a call option with a strike price of $55 and a put option with a strike price of $45 and an expiration date of one month from now. If the stock price moves significantly in either direction, the investor will profit from the increase in the value of one of the options and can sell the other option to limit losses. This strategy is often used by investors who are expecting volatility in the market but are unsure about the direction of the movement.