Straddles and strangles strategies both involve buying a call and put option on the same underlying asset, but the difference is how they're set up and the goals they achieve.
Updated Apr 20, 2023
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Straddles and strangles are typically considered advanced options trading strategies, but don’t let that deter you from giving them a shot. Investors use strangles when they predict that the price of an asset will drastically change up or down but aren’t sure which direction.
Investors also use straddles when they predict that the price of an asset will change, but perhaps not as sharply. At first glance, these two strategies might seem very similar, but there are unique factors to consider when deciding which one to use.
Here’s how investors might determine which is best for a particular situation. But first, let’s dive into the fundamentals.
A straddle is a type of options trading strategy. But if you’re wondering what options trading is, then you’re not alone. It’s often considered a more advanced (and riskier) type of investing.
At its core, options trading is buying contract that gives investors the opportunity to buy or sell an asset, like stocks, at a certain price and specific date.
Investors don’t even need to own the underlying asset—which can range from bonds, stocks, currencies, and commodities—to partake in options trading.
Straddles are used when investors believe that an underlying asset is going to move up or down but aren’t sure of the direction.
In order to set up a straddle, investors buy a call and put option at the same strike price and with the same expiration date. These are usually purchased at-the-money.
The investor is predicting that the price of the underlying asset will change, either up or down, before the expiration date.
A straddle means betting that the asset will go up or down in value enough that an at-the-money call or at-the-money put will be worth more than what the investor paid in premiums to purchase them.
That might sound complicated, but straddles are ultimately a prediction about the price volatility of an asset.
As long as that asset increases or decreases in value more than what the investor paid to purchase the contract, then the investor profits.
Like most investments and options trading strategies, there’s no guarantee that you'll make money. But, a lot of investors consider straddles to be less risky than other types of options trading.
For investors who are comfortable with some risk, enjoy following the markets, and regularly pay attention to things like company earning calls, then setting up a straddle might be tempting.
Here are some of the potential benefits of a straddle.
Direction doesn’t matter—There are a lot of reasons that investors like straddles, but the main one is that investors don’t need to know if the price of underlying asset is going to go up or down to make money.
Less movement required—As long as the asset changes in value, then investors stand to profit from a straddle. Compared to strangles, straddles require significantly less movement to become profitable for investors.
Limits on losses—there's a limit to how much an investor stands to lose with a straddle because the maximum an investor can lose is what they paid in premiums.
Volatility required—Even though straddles require less volatility in value than strangles in order to be profitable, they still require volatility. Because of that, straddles are often only profitable in volatile markets with large swings. So if you’re looking for a long-term, consistent investing strategy, straddles might not be a good fit.
Losses are guaranteed—When an investor buys a straddle, they're buying a call option and a put option. Profits are made when the value of the asset changes significantly, meaning that either the call or the put becomes worthless.
Investors need to account for the loss of the purchase price when determining their profit. Unlike other investment strategies, straddles will always include a loss, even if they are profitable.
Strangles are another type of options trading strategy. At first glance, strangles seem remarkably similar to straddles. But when you take a closer look, there are some noteworthy differences.
To set up a strangle, an investor buys a call option that is higher than the current market price, and they buy a put option that is lower than the current market price. Both are purchased for the same underlying asset and with the same expiration date, but the strike prices are different.
Investors utilize strangles when they predict that the price of the underlying asset will swing drastically in one direction or another.
Similar to a straddle, it doesn’t matter which direction it moves. It only matters that it happens.
With a strangle, an investor is betting that the underlying asset price will swing above the call price or swing below the put price.
Depending on which one occurs, the options contract could then allow the investor to purchase additional assets at a price below current value or buy at current value and sell for a profit. Either way, the investor is hoping for movement in value.
Cost less to set up—Because strangles are out-of-the-money options, they cost less money to set up than other options strategies. For investors who are interested in spending less money upfront, it’s a nice perk of the strategy.
Unlimited returns—There’s no limit to how high the price of a stock or other underlying stock can rise, which means that’s also no limit to how much investors can earn. Of course, there’s no guaranteed returns, but it’s nice to know that the sky's the limit.
Exit strategy—Like the name implies, options provide investors with options. Investors are not required to keep their options until the expiration date. They have the option to sell for a loss or gain throughout the life of the contract.
Volatility or bust—Just like straddles, strangles require market volatility. In fact, the swings in value need to be pretty dramatic in order for investors to earn a profit with strangles. This means that strangles are likely only profitable in certain market conditions.
Timing is everything—Options contracts for strangles have expiration dates, which means that the contract will expire. Because of that, timing is very important when it comes to strangles. For some people, that might make it a more challenging investment strategy.
Could lose it all—Even though the downside for strangles is limited to the amount paid in premiums, it’s possible for investors to lose all of their investment. Compared to other investment strategies with less risk, that’s a significant potential loss.
The strategies for straddle and strangle options are similar in the sense that the investor is making a bet about how the value of an underlying stock will change.
But determining which one to utilize depends on factors like the investor’s goals, available capital, and predictions about the specific asset.
Both with straddles and strangles, investors are making predictions about the future.
Investors are betting that the price of the underlying stock will swing up or down within a specific timeframe. There aren’t any guarantees, but for a lot of investors, that’s part of the appeal.
Both strategies require movement, but the direction doesn’t matter. That’s due to the fact that straddles and strangles involve buying both a call option and a put option on the same asset. Because of that, movement is the ultimate goal.
Call and put options contracts for straddles and strangles have the same expiration date. This means that the price movement of the underlying stock is time sensitive in both strategies. In other words, investors need to have a clear timeline for their prediction.
If you're going to utilize the stangle or straddle strategies, you need to know what sets them apart. Here are the main distinctions between the stangle vs staddle options trading strategies.
One of the biggest differences between straddles and straddles is the strike price. With a strangle, the strike prices are different.
With a straddle, the strike prices are the same. This might sound like a small difference, but it actually determines what (and how) the investor makes their prediction.
Strangles are out-of-the-money options which means that they are generally cheaper to set up, but it also means that they require significant price movement in order to be profitable.
Straddles also require movement, but the movement doesn’t need to be as drastic.
It’s usually cheaper to set up a strangle than it is to set up a straddle. That’s largely due to the fact that strangles require more movement to be profitable while straddles require less movement.
In other words, it’s often considered easier for a straddle to be profitable since less market volatility is needed. As a result, it costs more to set up.
Let’s imagine COIN is trading at $30, and an investor wants to set up a strangle. The investor decides to place a strike price for the call at $50 and also places a strike price for the put at $10.
The premium for the strike-call is $2 ($2 x 100 shares = $200), and the premium for the strike-put is $1 ($1 x 100 shares = $100).
The investor would pay a total of $300 in premiums in order to set up the strangle ($200 + $100 = $300).
Now it’s time to figure out potential profit. If the value of COIN stays between $10 and $50 during the life of the contract, then the investor will not earn a profit. Instead, the investor will lose the cost of the premiums.
But if the value of COIN rises above the strike price for the call or falls below the strike price for the put, then it gets interesting.
In this scenario, let’s imagine COIN shares a public quarterly report revealing that the company is releasing a new product and earnings have been higher than expected.
As a result, the value of COIN jumps to $80 before the contract’s expiration date. This means that the value of the call option would expire at $800.
This is good news for the investor because he or she would earn a total profit of $500 ($800 - $300 premium costs = $500).
Let’s imagine that a different investor wanted to set up a straddle for COIN when it’s trading at $30.
This investor purchases an at-the-money strike-call with a $4 premium ($4 x 100 = $400) and an at-the-money put-call with a $5 premium ($5 x 100 = $500). The total cost to set up the straddle would be $900 ($400 + $500 = $900).
Let’s say that COIN shares a quarterly report and the value of COIN dramatically rises to $80 before the contract’s expiration date.
This means that the call-option might now be valued at $50, which would provide a total value of $5,000 for the call contract ($50 x 100 = $5,000).
In this example, the investor would receive a total profit of $4,100 ($5,000 - $900 premium cost = $4,100).
When it comes to deciding between a straddle and a strangle, it’s important to start by reviewing your goals.
Here are some questions investors might want to consider:
Once you're clear on your goals and purpose, it’s time to explore different investing platforms.
Before you can decide whether you want a strangle or straddle, the first decision you need to make is what platform to use.
There are a few different options you might want to consider.
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Strangles have more profit potential than straddles but greater risk because of the spread between strike prices. Strangles are constructed by buying an out-of-the-money call and an out-of-the-money put with the same expiration date but with different strike prices. They have the potential to be more profitable because they cost less than straddles, but they have a narrower range of profitability. Straddles involve buying an at-the-money call and an at-the-money put with the same expiration date, and they cost more but have the potential for greater profits because of the wider range of profitability.
A straddle involves buying an at-the-money call, and an at-the-money put with the same expiration date. Straddles have a wider range of profitability and cost more than strangles. A strangle is buying an out-of-the-money call, and an out-of-the-money put with the same expiration date but with different strike prices. Strangles have a narrower range of profitability but cost less than straddles.
Strangles are typically cheaper than straddles because the strike prices of the options used in a strangle are further away from the underlying asset's current price than the strike prices of the options used in a straddle. Since the strike prices of the options used in a strangle are further away from the underlying asset's current price, they cost less than the options used in a straddle.
Long straddles and strangles are option trading strategies designed to profit from directional movements in the underlying asset's price. With a long straddle, the investor buys an at-the-money call and an at-the-money put with the same expiration date. With a long strangle, the investor buys an out-of-the-money call and an out-of-the-money put with the same expiration date but with different strike prices. In both strategies, the investor profits if the underlying asset's price moves past the strike price of either the call or the put
Straddles are generally considered to be safer than strangles because they have a wider range of profitability and cost less than strangles. However, the overall risk of each strategy depends on the underlying market and the specific options traded. Both strategies can be used to take advantage of directional price moves but can also expose traders to significant losses if the underlying asset does not make a big enough move in the predicted direction.
Yes, options straddles are risky. Buying an at-the-money call and an at-the-money put with the same expiration date carries the risk of losses if the underlying asset does not make a large enough move in either direction. Additionally, if the market is volatile, both the call and the put can be exercised, resulting in a loss. Therefore, it is important for traders to understand the risks and limitations of options straddles before trading them.
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