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Guide to Option Greeks

Two Minute Guide to Strangles and Straddles


Michael West

Strangles and straddles are two of the most widely used option strategies. The two strategies involve purchasing both call and put options for the same asset, with the same expiration date. The difference between the two is that in a strangle set up, the call and put options are at different strike prices (which is usually Out-Of-The-Money) whereas in a straddle set up, the call and put options share a common strike price (which is usually At or In-The-Money).


Strangles and straddles make profit when the market moves sharply in either direction. These strategies have limited losses but theoretically have unlimited upside, as the trade will continue to profit on either leg so long as it continues to move away from the strike price. With both strangles and straddles, volatility is the key as time decay is effectively doubled requiring the market to move violently to realize profit.

Straddle

Setup:
Purchase call and put options with the same strike price and expiration for the same underlying asset. While most set ups involve purchasing one call for every put option, they don't necessary have to be.

Benefits:
• Unlimited profit, limited losses
• Benefits from volatile assets or period. I.e. Earnings release
• Requires less of an adverse move in the market compared to strangle due to options being At or In-The-Money

Disadvantages:
• Requires the purchase of both the call and put options
• More costly than strangle as options are usually purchased At or In-The-Money

Call and put options in a straddle share a strike price
Strangle

Setup:
Purchase call and put options at different strike prices but same expiration for the same underlying asset. While most set ups involve purchasing one call for every put option, they don't necessary have to be.

Benefits:
• Unlimited profit, limited losses
• Benefits from volatile assets or period. I.e. Earnings release
• Cheaper than straddle strategy as options are purchased Out-Of-The-Money

Disadvantages:
• Requires the purchase of both the call and put options
• Requires significant move in the market due to options being Out-Of-The-Money

Call and put options are Out-Of-The-Money in a strangle trade

Straddles and strangles are two basic option strategies that profit from volatility in the underlying asset. Remember that with both of these strategies the market must be volatile in order to realize a profit and offset the cost of the other leg.