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Bullish Patterns
Long Calls
Bull Call Spread
Bull Put Spread
Call Backspread
Long Call Ratio Spread
Naked Put
Synthetic Long Stock
The Collar
Covered Calls
Synthetic Long Call
Synthetic Short Put
Covered Straddle
Covered Strangle
Married Put
Protective Put

Bearish Patterns
Long Puts
Bear Put Spread
Bear Call Spread
Put Backspread
Long Put Ratio Spread
Naked Calls
Synthetic Short Stock
Synthetic Short Stock (split strikes)
Covered Put
Protective Call
Synthetic Short Call
Synthetic Long Put

Long Volatility
Long Straddle
Long Strangle
Short Call Butterfly
Short Put Butterfly
Short Iron Butterfly
Short Call Condor
Short Put Condor
Short Iron Condor
Long Guts
Strip
Strap
Short Call Ladder
Short Put Ladder
Long Call Synthetic Straddle
Long Put Synthetic Straddle

Short Volatility
Short Straddle
Short Strangle
Long Call Butterfly
Long Put Butterfly
Long Iron Butterfly
Long Call Condor
Long Put Condor
Long Iron Condor
Short Guts
Long Call Ladder
Long Put Ladder
Call Ratio Spread
Short Call Ratio Spread
Put Ratio Spread
Short Put Ratio Spread
Ratio Call Write
Ratio Put Write
Short Call Synthetic Straddle
Short Put Synthetic Straddle
Variable Ratio Write

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Long Strangle

Risk: medium
Reward: very high

General Description
Entering a long strangle entails buying lower strike puts and an equal number of higher strike calls (same expiration month). It's similar to a long straddle except the strikes are staggered instead of the same.

(draw a long strangle risk diagram here)

The Thinking
You're not bullish or bearish, but you do think a big move is coming and along with it, an expansion in volatility. If the stock rallies, hopefully it rallies enough so the profit from the long calls more than offsets the loss from the long puts. If the stock drops, hopefully it drops enough so the profit from the long puts more than offsets the loss from the long calls.

Example XYZ is at $53, and your analysis says a big move is coming (earnings or some other big announcement). You buy (1) 55 call for $3.00 and (1) 50 put for $1.75. The net debit is $4.75

If the stock closes between the strikes ($50 and $55), the call and put will expire worthless, and you’ll incur a loss equal to the net debit.

Above $55, the puts will expire worthless, and the call will increase in value point-for point with the underlying. For example, at $65, the put will be worthless ($1.75 loss), and the call will be worth $10 (netting a profit of $7) for a total profit of $5.25.

Below $50, the call will expire worthless, and the put will increase in value point-for-point with the underlying. For example, at $40, the call will be worthless ($3.00 loss), and the put will be worth $10 (netting a profit of $8.25) for a total profit of $5.25.

The PL chart below graphically shows where this trade will be profitable and at a loss.