Straddles and strangles are two options strategies enabling investors to capitalise on substantial fluctuations in a stock’s price, regardless of whether the price goes up or down. In both methods, investors acquire an equal number of calls and put options that share the same expiration date. If you are looking to delve into options trading in India, you should know how these strategies vary. This would help you to implement each of them at the right time in the market.
What are Straddles and Strangles?
Traders employ long straddle or strangle option strategies when they anticipate a significant move in an underlying stock, but they are uncertain about the direction. This uncertainty may arise, for example, before an earnings report or a product launch, where the impact on the stock price is uncertain. In such situations, where an increase in volatility is expected, these strategies—long straddles and strangles—can provide exposure to potential future price swings.
In a long straddle, a trader buys both a call and a put on the same underlying security, with identical strike prices and expiration dates. On the other hand, a long strangle involves purchasing a call and putting on the same underlying security, with the same expiration date but different strike prices.
Straddles vs. Strangles: Directionally Agnostic
Straddles and strangles, as options strategies, are considered “directionally agnostic,” meaning they focus on the size of a move rather than its direction. When you buy an at-the-money straddle, the call’s delta is offset by the put’s delta, resulting in a net delta close to zero. This implies that a significant move in the underlying stock’s price, whether up or down, should have a similar impact on the straddle’s theoretical value.
The same principle applies to a strangle composed of equivalent-delta options. A substantial move in either direction is recognised as a substantial move. While it’s true that if the stock price goes up, the call gains value and the put loses value, the key factor is the magnitude of the move. As the stock price continues in one direction, the in-the-money options leg should increase in value, eventually moving in line with the underlying stock. Meanwhile, the out-of-the-money leg approaches zero but can’t go lower.
Difference Between Straddle vs Strangle
Here is the table outlining the points between straddle v/s strangle:
| Criteria | Straddle | Strangle |
| Strike Prices | Same for both call and put options | Different for call and put options |
| Cost | Higher cost due to buying at-the-money options | Lower cost as options are out-of-the-money |
| Profit Potential | Higher potential profits if the stock price makes a large move | Potential for profits if the stock makes a very large move |
| significant move in either direction | significant move, but less costly than a straddle | |
| Break-Even Points | Narrower range as the stock must make a more significant move | Wider range as the stock can make a move in either direction |
| significant move to cover the premium paid | either direction to cover the premium paid | |
| Risk | Higher risk if the stock doesn’t make a large move | Lower risk as the stock has a broader range |
| significant move | cover the premium paid | |
| Market Conditions | Expectation of high volatility or impending | Expectation of moderate to high volatility with |
| events (earnings, product launches) | uncertainty about the direction of the move |
Risks of Long Straddle and Strangle Options Strategies
Let’s now look at the riks associated with these strategies.
Let’s now look at the risks associated with these strategies below:
Long Straddle
Here are the risks of long straddle options trading strategies.
Here are the risks of the long straddle options trading strategy.
- Market Movement: Losses if the underlying stock doesn’t make a significant move in either direction.
- Time Decay: Vulnerable to time decay, as options lose value over time, eroding premiums.
- Cost of Strategy: Higher cost due to purchasing both a call and a put option at the same strike price.
- Implied Volatility: Adverse impact if implied volatility doesn’t increase as expected.
- Limited Profit Potential: Limited profit potential, as the stock must make a significant move to cover the premium paid.
- Directional Uncertainty: High risk if there’s uncertainty about the direction of the stock’s move.
Long Strangle
The following are some risks of the long strangle options trading strategy.
- Market Movement: Losses if the stock doesn’t make a significant move in either direction.
- Time Decay: Vulnerable to time decay, especially for the out-of-the-money option.
- Cost of Strategy: Lower upfront cost, but still significant compared to a single-option strategy.
- Implied Volatility: Adverse impact if implied volatility doesn’t increase as expected.
- Limited Profit Potential: Limited profit potential and the stock must make a substantial move to cover costs.
- Directional Uncertainty: Lower risk due to a broader range for the stock to move in either direction.
Conclusion
Understanding the difference between straddles and strangles is crucial for options traders seeking to guide volatile market conditions. Straddles involve higher costs and risks, they offer potentially higher profits if the stock makes a significant move. Conversely, strangles present a more traditional approach with lower upfront costs and broader break-even points. Traders should carefully weigh the advantages and risks associated with each strategy. Experience seamless and advanced stock trading with the Share India platform – best stock market trading app offering a user-friendly interface and a plethora of trading features to elevate your trading journey. Ultimately, a well-informed approach to straddles and strangles can enhance a trader’s ability to navigate the complexities of options trading and seize opportunities in dynamic markets.