A long strangle financed by a wider short strangle; a defined-risk debit trade that pays if the underlying moves far enough in either direction.
Buy the near strangle, sell the far one. The result is a long-volatility position with a ceiling: you profit as the underlying moves out past the long strikes, and the gain stops at the short strikes where the wings take over.
It is the structure for a known catalyst with an uncertain direction and a known cost. Compared with an outright straddle it costs less and suffers less from iv-crush, because the short legs also lose value when volatility collapses — but the capped profit means a genuinely violent move pays no better than a moderate one.
Example: XYZ at $50 before earnings. Buy the $52.50 call and $47.50 put for $1.80 total, sell the $57.50 call and $42.50 put for $0.55, a $1.25 debit. Max loss $125, max profit $375 beyond $57.50 or below $42.50.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Iron condor: payoff at expiry. Four strikes: the 2 credit is kept in full while the price finishes between 95 and 105, and is lost gradually outside the 93 and 107 breakevens. The bought 90 put and 110 call stop the loss at 3 on either wing.Long straddle: payoff at expiry. A 100 call and a 100 put bought together for 8 make a V. A quiet market that ends near 100 costs the whole 8; the position only turns positive once the price finishes below 92 or above 108, whichever way it goes.
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