"Straddles and strangles are similar strategies aiming to profit in specific situations. When you use a long straddle or strangle, you're betting on big moves or volatility in a stock's price. Meanwhile, a short straddle or strangle works when the prices remain stable.
A long straddle involves buying call and put options for the same stock, having the same expiration date, and identical strike prices. Conversely, a strangle means purchasing put and call options for the same stock with the same expiration date but different strike prices.
The main differences lie in their costs and the needed price movement to make a profit. Strangles usually require a larger price movement in the stock before you start making a profit."
"Strangle and straddle options strategies aim to make money by predicting if a stock's price will be volatile or stable. These strategies involve buying or selling both put and call options for the same stock.
Both strangles and straddles allow investors to profit based on their expectations of how much a stock's price might change. You don't need to guess the exact direction, just whether the price will move a lot or stay relatively steady."
"Long straddles and strangles make money when prices of stocks move a lot. On the other hand, short straddles and strangles earn profits when stock prices stay stable or trade in a narrow range."
But that's where the similarities stop.
| STRADDLES | STRANGLES |
| The strike prices and expiration dates for the options are identical. | The options share the same expiration date but come with different strike prices. |
| The total value of the options shifts with any movement in the stock's price. | A bigger shift in the stock's price is needed to alter the overall value of the options. |
| Costs more to put into action | Costs less to put into action |
| No specific preference or leaning towards a particular direction | Some potential preference or inclination towards a specific direction |
One major difference between straddle and strangle strategies is how they use strike prices.
In a straddle, both the call and put options share identical strike prices. However, in a strangle, the puts and calls have different strike prices.
In a straddle, if the stock's price changes, the options' total value changes right away. For instance, if a stock is at ₹50, you might buy a call and a put at the ₹50 strike price. Initially, you'll lose the premium payments, but if the stock moves a lot, you can use the right option to make a profit.
In a strangle, let's say the stock is at ₹50. You might buy a call at ₹55 and sell a put at ₹45. You'll lose the premium cost, and as long as the stock stays between ₹45 and ₹55, using the options doesn't seem worthwhile. However, if the stock goes above or below those prices, you can exercise the option to make money.
Usually, straddles cost more to set up since they require buying options that are closer to the current stock price, often called at-the-money options. These at-the-money options have strike prices that match the stock's current price.
Strangles tend to be cheaper to start because they involve buying options that are more out-of-the-money. But, the tradeoff is that for strangles to start making money, they need bigger price movements.
Usually, both straddles and strangles don't rely on which way stock prices move; they focus on how much the stock's price changes or remains steady.
However, in strangles, where options are bought or sold at different strike prices, investors can introduce a directional preference. For instance, if a stock is at ₹50 and an investor believes it's more likely to rise than fall, they might buy a call at ₹52 and a put at ₹42. Here, the investor profits more from the stock's price increase than from an equal decrease.
If you're exploring straddles and strangles, both help you make money by predicting how much a stock's price will change. The right strategy depends on your resources and how comfortable you are with dealing with changes in options' values.
Straddles cost more and can be more unstable compared to strangles. They suit investors with more money and who can handle ups and downs in value.
On the other hand, strangles are cheaper and less volatile. They might be better for beginners or those less experienced with complex options strategies.
Options belong to a category called derivatives, which can be quite risky. Before you begin trading derivatives, it's crucial to completely grasp the potential dangers involved.
With long straddle or strangle strategies, your risk is restricted to the premium you pay. However, if you use short straddles or strangles, there's a chance of facing unlimited risk for investors.
When you buy options in long straddles or strangles, your risk is limited to the premium you spent on those contracts. But, the potential profit is unlimited because the stock's price could, in theory, keep rising without any limit.
Selling options in short strangles or straddles can lead to unlimited losses. If the stock price stays unchanged, you make a profit equal to the premium received. However, if the stock drops to ₹0, you might face significant losses. If the stock price keeps rising, the losses could be unlimited because there's no cap on how high the stock price can go.
Straddles and strangles are complex strategies in options trading. They aim to make money by guessing how much a stock's price might change. The main difference lies in their costs and the needed price shift before options start gaining value.
If you're good at predicting if a stock's price will change but unsure about the direction, these strategies could suit you.
For more content like this, sign up for The Balance's newsletter! Get daily financial insights, analysis, and tips delivered directly to your inbox every morning!
