strategies
Strangle Breakeven
A strangle uses OTM options instead of ATM, requiring a bigger move but costing less premium.
Formula
Long Strangle: BE_up = Call Strike + Total Premium BE_down = Put Strike - Total Premium
Variables
- Call Strike
- OTM call strike (above current price)
- Put Strike
- OTM put strike (below current price)
- Total Premium
- Cost of call + cost of put
Worked Example
Inputs
- S
- $100
- Call
- $105 call @ $2.10
- Put
- $95 put @ $1.90
Calculation Steps
- 1
Total Premium = $2.10 + $1.90 = $4.00 - 2
BE up = $105 + $4 = $109 - 3
BE down = $95 - $4 = $91 - 4
Need ±9% move (wider than straddle BEs)
Result: Breakevens: $91 and $109 — need ±9% move
Intuition
Short strangles are the bread and butter of premium sellers. By selling the 16Δ put and 16Δ call, you collect premium with ~68% POP. The risk is unlimited, so always know your max acceptable loss and manage accordingly.