A strangle option strategy involves buying (or selling) an out-of-the-money call, and buying (or selling) an out-of-the-money put with the same expiration.

A strangle buyer expects the price of the stock to move significantly outside of the range of the calls and puts. The seller of a strangle expects the price to remain between the two strikes. It’s called a strangle because the seller is trying to strangle/squeeze/choke the price in between the two strikes.

chart courtesty of wikipedia

You can see with buying a Strangle that your loss is limited to what you paid. Between the two strike prices you will lose your entire purchase price (at expiration). Above the call strike you will begin to lose less and less until the stock price exceeds the strike price + the purchase price, at which point you will begin to make money. On the put strike you will lose less and less until the stock price drops below the strike price – the purchase price, at which point you will begin to make money.

chart courtesy of wikipedia

The whole thing is flipped on its head if you are the seller of the strangle. Now you keep the full premium price if the stock price stays between the two strike prices. You will begin to make less as the price moves outside of the strike price, until the call goes beyond the strike + the premium collected, or the put goes beyond the strike minus the premium collected, at which point you will begin to lose money.

In this video I'll walk through the basics of a strangle.

See Iron Condor for a similar style trade, but with risk limits capped.