Straddle vs. Strangle Options: What Are the Difference?

Right through this guide, we will discuss straddle vs. strangle options and their differences. The straddle and strangle strategies can capitalize on changes in implied volatility (IV) and stock price volatility. 

Both straddles and strangles require buying a call option and a put option, each with a different premium and the same expiration date. Option straddles and option strangles limit the risk to the premiums originally paid. 

Traders keep the premium if both options expire worthlessly. Options straddle, and options strangle in that it takes time to complete. 

Both strategies' profit potential is the same since they have the same time premium. The downside to an option straddle is that it can lose more value if there is little movement during the trade. 

Those holding a strangle lose all of their money if there is no movement, whereas those holding options lose only the cost of buying them.

What is a straddle?

Buying both a call and a put option simultaneously for underlying security with the same strike price and the expiration date is called straddling.

If the strike price of the security rises or falls by an amount exceeding the premium paid, the trader will profit from a long straddle. If the underlying security's price moves sharply, the profit potential is virtually unlimited.

Straddle Options Strategy Indicators and Signals

Striking both a call option and a put option on the same underlying security at the same strike price and the expiration date is an options strategy known as a straddle.

Stocks are profitable only if they rise or fall more than the total premium paid from the strike price. In essence, a straddle represents the likely volatility and trading range of security by the expiration date.

What is a strangle?

This strategy involves simultaneously buying an out-of-the-money put and out-of-the-money call on the same underlying stock with the same expiration date.

Strangles are good options when you expect a significant price movement for the underlying security shortly but are unsure of its direction. Nevertheless, it is profitable if the price of the asset swings sharply.

Strangle Options Strategy Indicators and Signals

Strangles use options with different strike prices, whereas straddles call and put options with the same strike price. Strangle trading strategy has a call and a put held on the same underlying asset.

A strangle covers investors who are uncertain about the direction of an asset but believe it will move dramatically. A strangle is profitable if the underlying asset experiences a rapid price swing.

Options straddle example

Strategists expect price movement and volatility to be significant. By buying both calls and puts, the trader anticipates that there will be a move either up or down. Consider, for example, that our market participant expects the IV to increase from 12% to 20%. 

A $50 call option would be purchased with a strike price of $50.00, while a $50 put option would be purchased with a strike price of $50.00 for a total cost of $50.00. 

When the stock trades above the $50.00 strike price, the trader will exercise the call option, which will result in a profit with protected downside risks. The trader would exercise the put option if the stock traded below the $50 strike price at expiration.

Options strangle example

The strangle buyer is also anticipating significant increases in volatility and price. The traders expect a substantial move to the upside and believe they can take advantage of this increase while protecting themselves by purchasing both calls and puts. 

An OTM ($55) put option would be purchased for $50.00, and an OTM call option would be purchased for $55.00 for a total cost of $55.00. 

The trader will exercise their call option if the stock is trading above the $62.00 strike price at expiration, which would result in a profit with protected downside risk. 

The trader would exercise the put option if the stock traded below the $50 strike price at expiration.

Advantages of a strangle

A few reasons why investors can benefit from including strangles in their portfolio are as follows:

1. Total returns are possible. Profit will be higher from executing a call or put option if the stock price increases or decreases. Since the stock price can go as high as it wants, there is no upper limit to the potential return from a call option. As for the put option, the stock price cannot fall below zero (this is not the case for the call option).

2. Strangles have an infinite potential return, but their losses are limited to the value of the options purchased. You can lose only as much as you paid for the options. This unlimited upside potential and limited downside make the strangle extremely rare.

3. Your options can be resold. If your confidence in the stock price fluctuates sufficiently before the options expire or you desire to lock in gains, reselling your options might be a smart exit strategy. As a result, you can realize gains before expiration or limit losses if the options are already worthless but have already fallen in value.

Disadvantages of a strangle

Strangles have their benefits as investments, but they also have their drawbacks. Here are a few to consider before investing:

1. There is only a limited amount of time. Basically, you're betting that the stock price will move enough before its expiration date for you to make a profit. If it does not, you have no choice but to wait for your prediction to come true as you would with actual investment, such as buying or shorting the company's stock.

2. There are limited downsides, but they are still significant. Yes, your downside is the cost of the options. On the other hand, the downside is significant if you consider it from the percentage point of view. Then, you will have lost 100% if the options expire worthless, reflecting the inherent risk associated with all options strategies.

3. To break even, investors need significant price movements. The underlying stock price must move significantly to break even. The stock price will not earn you a penny even if it moves moderately in either direction if the strike prices of any of the options do not exceed the total premiums paid.

Advantages of a straddle

1. Straddling is one of the most time-value-eroding strategies available. Strangling is a close second. Due to this, you get double the premium amount, as you are selling both sides of the market.

2. There is a negative correlation between them. A move will result in profit for one and loss for another. In general, there is less risk involved.

3. Selling a straddle at a time of high volatility in which volatility is expected to decline is an ideal strategy for selling as much vega as possible.

4. Right around the current stock price, the strategy makes the most money. According to the actual distribution of stock price changes, the price will most likely be somewhere in the mid of the bell curve in the future. This makes for a relatively safe play.

Disadvantages of a straddle

1. It is almost certain that a straddle will hit on one leg. How far the stock's money runs and how much premium was collected determine overall profitability.

2. It is roughly twice as likely that you will lose in a directional play as you would in a single-sided option sale.

3. Surviving the stock market is the key to success. When a buyout takes place, the sold call may get destroyed. This leg is best hedged with a protective call purchased at a higher strike.

4. It is twice as likely that you will lose money if you are wrong about volatility. That can be devastating.

5. Superior stock selection skills are not advantageous.

Short strangle vs. short straddle.

A short straddle differs from a short strangle in that the call and put sold at the same price in a short straddle.

When a strangle occurs, you sell out-of-the-money calls and puts.

Consequently, you will receive less premium, but you will have a larger margin of error if the stock does move in a big direction.

Straddles have a higher intrinsic value than strangles but offer narrower profit ranges because of the combination of a short call with a short put at-the-money

The safety zone of a short strangle is much larger than that of a short straddle, which some option sellers prefer.

Long strangle vs. long straddle

Strangles is constructed by buying a call with a higher strike price, followed by a put with a lower strike price. Both cases have a similar underlying stock and expiration date, but the strike prices are different. 

An underlying stock rises above or below the upper break-even point in a long strangle, resulting in net debt (or net cost). Upside potential is unlimited, and downside potential is substantial. Commissions and strangle costs constitute the potential loss.

The long straddle involves buying long calls and long puts with the same expiration date and strike price on the same underlying asset. As a result, long straddle strategies carry the risk of the market not reacting strongly enough to the news or event.

Entering: long straddle vs. short straddle

Long straddles are calls purchased at the same strike price for the same expiration date. If a stock trades for $100, it is possible to purchase a long call at the $100 strike price and a long put at that price. 

An asset with a higher price will have a higher premium. Option prices will rise as volatility increases. Options will cost more the farther away the expiration date is from trade entry.

Buy-to-open: $100 call

Buy-to-open: $100 put

A short straddle is entered by simultaneously selling a short put and a short call. For example, a call and put option can be sold at $100 if a stock is trading at $100.

Sell-to-open: $100 call

Sell-to-open: $100 put

Option prices will increase if volatility increases. Whenever an option expires from trade entry, it will cost more, and the premium collected when it is sold will increase.

Existing: long straddle vs. short straddle

Long straddles are used to profit from a sharp change in stock price, implied volatility, or both. The trade exits by selling-to-close (STC) the two long options contracts if the underlying asset moves far enough before expiration or if implied volatility expands. 

Net profit or loss on the trade is the difference between the cost of buying and selling the premiums.

There is a high likelihood that one of the options will be in the money at expiration and must be exercised or exited. Typically, long straddles are sold before expiration by investors who want to cash out while their intrinsic value still exists.

Short straddles take advantage of time decay, minimal price movement, and a decline in volatility. If you want to prevent an assignment, you must close the short option position at expiration if it is in the money and at risk of assignment.

A buy-to-close (BTC) order can be placed at any time before expiration. The position will profit if the options are bought for less than they were sold for.

Time decay: long straddle vs. short straddle

Long-straddle strategy is affected by time decay or theta. Long options contract value decreases with each passing day. In an ideal scenario, a large increase in the underlying stock price occurs quickly, and an investor can sell the option to capitalize on the remaining intrinsic time value.

The short straddle strategy can take advantage of time decay, or theta. Options contracts lose time to value by the end of every day. As the option approaches expiration, theta will lose value exponentially as the underlying stock moves minimally. 

As the value of the options contracts declines, the investor may purchase them for less money than they were initially sold for.

Adjusting: long straddle vs. short straddle

In general, straddles can be adjusted just like most options strategies, but their cost will almost always be higher and, thus, the break-even point will be extended, and the trade will incur a debit.

An option can be sold below the long put option and above the long call option to convert a long straddle to a reverse iron butterfly. You reduce your maximum loss if you sell the options and get credit, but your maximum profit is capped by the spread minus the total debt paid.

The time horizon for short straddles can be extended by extending one of the spreads upward or downward as the price of the underlying stock moves. Investors who want to maximize the chance of success in straddles have two options as they approach expiration if one side of the position is deep-in-the-money.

Alternatively, you can close the whole position for a later expiration date and reopen it. Increasing the credit on a short straddle typically leads to greater profit potential, decreased risk, and a wider break-even point. 

Contract sizes and expiration dates should not change to maintain a risk profile.

Related questions: FAQs

Which is more profitable, straddles or strangles?

You should be aware of two main differences. First, with a Short Strangle, your Probability of Profit (POP) on the trade will be slightly higher, whereas, in a Short Straddle, your POP will be lower.

The strangle is cheaper than the straddle; why is that?

In a straddle, an investor buys a call and puts options that are "at the money." However, in a strangle, an investor buys a call and puts options that are "out-of-the-money." Accordingly, the strangle strategy is less expensive than the straddle.

Is it possible to lose money on a straddle?

When held to expiration and both options expire worthlessly, the potential loss is limited to the total cost of the straddle plus commissions. Both options will expire worthlessly when the strike price is the same as the stock price at expiration.

How soon should you buy a straddle?

Market volatility and price movement uncertainty are used to determine when to use the straddle option. If an option has a long expiry, it makes sense to use a straddle.

Are straddles always effective?

You can profit from stock movement regardless of which direction it moves. For example, stock prices that stagnate are the enemy of straddles, but if shares rise or fall significantly, a straddle can be profitable both in bull and bear markets.

Bottom line

Options strategies such as strangles and strangles allow investors to gain from significant moves in a stock's price, regardless of whether the stock rises or falls. 

In both approaches, one purchases equal numbers of call and put options that expire simultaneously. Straddles have a common strike price, while strangles have two different prices.

Straddles offer protection to investors regardless of the direction the stock price moves in. Straddles are useful when an investor believes that the stock will move in one direction or another but wants to make sure he's protected just in case.

Tax laws surrounding options trading gains and losses are complex, and investors should familiarise themselves with them.