A long straddle options strategy involves buying call and put options on the same security with the same expiration dates, as well as the same strike price. An options strangle involves purchasing put and call options on the same security with the same expiration date but different strike prices. In addition to that, the key differences between the two strategies include the cost of implementing each and the price movement required before you begin to earn a profit. Strangles typically require more movement in the underlying stock’s price before you begin turning a profit.
What’s the Difference Between Straddles and Strangles?
Strangle and straddle options strategies are both aimed at making profits based on volatility or the lack thereof. That is because both these strategies involve buying or selling put and call options on the same security. Both straddles and strangles are designed to let investors profit based on their predictions about a stock’s price volatility. Investors don’t have to predict the direction of the movement, simply whether the stock’s price will change significantly or hold steady. However, that is where the similarity ends. In a straddle strategy, the net value of the options will begin to change as soon as the underlying stock’s price starts to move. If a stock is trading at $50, you may choose to buy both a call and a put with a strike price of $50. You’ll lose the money you paid in premiums, but if the stock moves significantly in one direction or the other, you can exercise the relevant option to earn a profit. In a strangle strategy, for example, the underlying stock is trading at $50, and you may buy a call option with a strike price of $55 and sell a put with a strike price of $45. You’ll lose the money paid in options premiums and as long as the underlying stock remains between $45 and $55, exercising the option won’t make sense. However, if the price moves above or below those amounts, you can exercise the option to earn a profit.
Cost to Implement
In general, straddles are more expensive to implement because they involve buying options closer to the stock’s current price, typically at-the-money options, where the strike price equals the price of the underlying stock.
Directional Bias
Typically, both straddles and strangles are considered direction neutral, which means they do not depend on which way the stock prices move, caring only for the magnitude of changes in stock price or the lack thereof. However, because strangles involve buying or selling options at different strike prices, investors who think that a stock is more likely to move in a specific direction can add directional bias to their strangle. For example, if a stock is trading at $50 and the investor thinks it is more likely to gain value than lose it, they could buy a call with a strike price of $52 and buy a put with a strike price of $42. In this scenario, the investor will earn more from an increase in the stock’s price than from a decrease in the stock’s price of the same magnitude.
Which Is Right for Me?
If you’re interested in straddles and strangles, both accomplish a similar goal: letting you profit from predictions about a stock’s volatility. Which strategy is right for you depends on your resources and willingness to accept volatility in the value of your options. Straddles cost more to implement and are more volatile than strangles. This makes them better for investors with more capital and a willingness to deal with volatility. Strangles are less expensive to implement and less volatile, so they may be better starting points for investors who are not used to advanced options strategies.
Other Information
Options are a type of derivative, and derivatives can be highly risky. It’s important to fully understand the risks before you start trading derivatives. Long straddles and strangles both involve purchasing options. Buying options contracts means that your risk is limited to the premium you paid to buy the contracts. Your potential profit, however, is unlimited because the price of the underlying stock could theoretically rise infinitely. Short strangles and straddles involve selling options. When you sell options, you face potentially unlimited losses. If the stock price holds steady, you’ll earn a profit equal to the premium you received when selling the options. If the stock price falls to $0, you could lose a significant amount; if the stock price rises, you could lose an unlimited amount because there is no limit to the stock’s potential price increase.
The Bottom Line
Straddles and strangles are both advanced options strategies that let investors try to profit by predicting a stock’s volatility. The primary difference is their cost and the change in value required before the value of the options changes. If you can predict the direction of a stock’s price change, but feel like you know whether it’s going to change or not, these strategies might be right for you.Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
