Options Straddle vs Strangle: How Do They Differ?

The straddle and strangle options trading strategies are very similar in nature. 

Both of these strategies allow investors to profit from large moves in an underlying security (long straddle/strangle) and neutral markets (short straddle/strangle).

The difference between the straddle and strangle lies in the strike price structure:

➥ The straddle only uses one strike price.

➥ The strangle uses 2 strike prices.

So what does this mean when comparing the performance of these two option strategies? Let’s find out!

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              TAKEAWAYS

 

  • Both the long straddle and long strangle allow traders to profit from large upside and downside swings in a stock.

  • Short straddles and strangles allow investors to profit when the price of an underlying stock/ETF/index fluctuates very little over the duration of the options life.

  • The straddle has a higher degree of risk than the strangle.

  • Short straddles and strangles benefit from time decay (theta); theta works against long straddles and strangles.

  • Straddles and strangles are often sold around earnings to benefit from “vol crush”.

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What Is An Options Straddle?

Long Straddle Video

Short Straddle Video

The options straddle strategy consist of two inputs:

  1. Buy/Sell 1 ATM Call Option.
  2. Buy/ Sell 1 ATM Put option.

To be a straddle, both options must be of the same strike price and expiration; the only difference is in the type of options. A straddle consists of both a call option and a put option

Buying at-the-money (ATM) call and put options will result in a long option straddle. Here is the profit/loss graph of this strategy at expiration.

Long Straddle

long straddle

Selling at-the-money (ATM) call and put options will result in a short options straddle. Here is the profit/loss graph of this neutral strategy at expiration.

Short Straddle

Short Straddle

Let’s next break own the various scenarios under which both the long and short straddle will profit, break even, and lose money. 

Straddle: Profit, Breakeven and Loss Scenarios

Long Straddle Short Straddle

Maximum Profit

Unlimited

Total premium received

Maximum Loss

Total debit paid

Unlimited

Breakeven Point

1) Strike A plus the net debit paid.

2) Strike A minus the net debit paid.

1) Strike minus the net credit received.

2) Strike plus the net credit received

Time Decay Effect (Theta) 

Sheds value as time passes, resulting is losses

Sheds value as time passes, resulting in profits. 

What Is An Options Strangle?

Long Strangle Video

Short Strangle Video

The options strangle strategy consist of two inputs:

  1. Buy/Sell 1 OTM Call Option.
  2. Buy/ Sell 1 OTM Put option.

The strangle is like the straddle in that this strategy too involves purchasing/selling both a call option and a put option of the same expiry cycle on the same underlying. There are, however, some pretty big differences. Let’s learn them next!

Options Straddle vs Strangle: Trade Setup

Straddle vs Strangle Difference #1: Moneyness

➥ The straddle generally involves purchasing at-the-money options.

➥ The strangle involves purchasing out-of-the-money options.

Straddle vs Strangle Difference #2: Strike Prices

➥ In the straddle, both options purchased are of the same strike price.

➥ In the strangle, the options purchased are of different strike prices. 

Let’s next take a look at the profit/loss graph of both a long strangle and a short strangle!

Long Strangle

long strangle at expiration

Buying an out-of-the-money call and put option with different strike prices of the same expiration cycle on the same underlying security will result in a long strangle, as visualized above.

Short Strangle

short strangle chart

Selling an out-of-the-money call and put option of the same expiration cycle on the same underlying security with different strike prices will result in a short strangle, as visualized above.

Let’s next break down the various scenarios under which both the long and short strangle will profit, break even, and lose money. 

Strangle: Profit, Breakeven and Loss Scenarios

Long Strangle Short Strangle

Maximum Profit

Unlimited

Total premium received

Maximum Loss

Total debit paid

Unlimited

Breakeven Point

1) Strike A minus the total debit paid.

2) Strike B plus the total debit paid.

1) Strike A minus net credit received

2) Strike B plus the net credit received

Time Decay Effect (Theta) 

Sheds value as time passes, resulting is losses

Sheds value as time passes, resulting in profits. 

Option Straddle Trade Example

Let’s first check out a straddle on Apple (AAPL).

➥AAPL Stock Price: $180

➥Days to Expiration: 10

➥Put Option Strike: 180

➥Put Option Premium: 1.49

➥Call Option Strike: 180

➥Call Option Premium: $1.51

So we can see here that the total cost (or credit) from this trade will be $3 (149 + 151).

Let’s fast-forward 10 days to expiration and see how this trade did. 

➥AAPL Stock Price: $180 –> $190

➥Days to Expiration: 10 –> 0

➥Put Option Strike: 180

➥Put Option Premium: 1.49 –> 0

➥Call Option Strike: 180

➥Call Option Premium: $1.51 –> $10

So how did we do? We must first determine which side of the trade we took.

Like all options strategies, the straddle can be both bought and sold. Let’s first see how the short side performed.

Short Straddle Trade Results

The initial price of our above straddle was $3. If we sold this straddle, we will profit as long as the combined value of both our short call and short put is trading under $3 at expiration.

At expiration, we can see that AAPL rallied $10 a share, all the way up to $190/share. 

This was good news for our short put. It fell in value from $1.49 to 0.

However, our short call did not fare as well. Since AAPL closed at $190 on expiration, our short call was in-the-money by $10, resulting in a final intrinsic value of $10. 

This means we lost $10 here. 

But remember, we took in a credit of $3 initially. Therefore, our total loss at expiration would be $7 ($10-3). Taking into account the multiplier effect of 100, this would result in a loss of $700.

Long Straddle Trade Results

If you understand how the short straddle works, you should have no problem understanding how the long straddle works. 

For the long straddle, we would have purchased both options originally for $3. This net debit paid is also our max loss. 

At expiration, the combined value of the put (worth $0) and call (worth $10) was $10. Remembering we paid $3 initially for this trade, the profit to us here is $7 (10-3), or $700.

This should make sense – if selling this strategy lost $700, buying it must make $700.

 

Option Strangle Trade Example

Let’s now check out a strangle on Netflix (NFLX).

➥NFLX Stock Price: $390

➥Days to Expiration: 20

➥Put Option Strike: 385

➥Put Option Premium: $16.10

➥Call Option Strike: 395

➥Call Option Premium: $15.90

So we can see here that the total cost (or credit) from this trade will be $32 (16.10 + 15.90).

Let’s fast-forward 10 days to expiration and see how this trade did. 

➥NFLX Stock Price: $390 –> $388

➥Days to Expiration: 20 –> 0

➥Put Option Strike: 385

➥Put Option Premium: $16.10 –> 0

➥Call Option Strike: 395

➥Call Option Premium: $15.90 –> $0

In this trade outcome, the price of NFLX did not move very much. This should tell you right away that selling options would be probably more profitable than buying options. 

Short Strangle Trade Results

At expiration, the combined value of both our short put and short call is $0.

Why? The stock closed at $388. Our 385 put is therefore out-of-the-money and valued at $0. Our 395 call is also out-of-the-money and also valued at $0.

What does this mean for us? We will collect the full premium of $32 received. Taking into account option leverage and the multiplier effect of 100, we will net a profit of $3,200 on this trade!

Long Strangle Trade Results

Since selling this straddle resulted in a profit of $32, the long party must have lost $32.

In order to establish this long strangle position, a trader paid a net debit of $32. If at expiration both of these options are worthless, this will translate to a complete loss of $32, or $3,200. Ouch!

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* Applicable exchange, clearing, and regulatory fees still apply to all opening and closing trades except for cryptocurrency orders which are not subject to exchange, clearing, and regulatory fees.

Is The Straddle or Strangle Safer?

  • Neither the short straddle nor short strangle are safe strategies on account of their short call composition.
  • The short strangle has marginally less risk on account of its dual out-of-the-money structure.

  • Long strangles are generally cheaper to buy than long straddles. 
  • Since long strangles require a smaller net debit than long straddles, the maximum risk on long strangles makes them marginally safer than long straddles – probability aside.

When Should You Buy Strangles and Straddles?

Long straddles and strangles are best suited for traders who believe a stock is going to go up or down by a significant amount before the options expire.

 Both of these strategies are directionally agnostic. This simply means (for longs) we don’t care whether the underlying goes up or down, so long as it moves. The opposite is true for short positions in these strategies

Though long straddles cost more than long strangles, their chance of success is greater. Why? Both options bought are at-the-money. With long strangles, both the options bought are out-of-the-money, requiring the underlying to move a greater distance to achieve profitability. 

Straddles and Strangles: What's the Risk?

Straddle vs Strangle Risks

➥ For long straddles and strangles, the primary risk is time decay, or “theta”. Options are decaying assets. With every passing day, if the underlying price does not change, long straddles and strangles will shed value.

Since straddles and strangles are comprised of two options, theta occurs on both legs simultaneously in a stagnating market. 

Additionally, the underlying must move by a significant amount to breakeven on these strategies. This is particularly true in options with high implied volatility (IV).

➥ For short straddles and strangles, the risk is dually high. Theta works to the advantage of short options, but when an underlying begins to move significantly up or down, huge losses can occur!

In order to learn more about the risks associated with options, read this article from the OIC

Straddles and Strangles for Trading Earnings

The straddle and strangle are both great options strategies for trading earnings

Nobody knows how a stock will react post-earnings report. 

➥ For traders who believe a stock will make a significant move either up or down, the long straddle and strangle are great strategies to capitalize off this potential move. 

➥ For traders who believe a stock is not going to move very much post-earnings, the short straddle and strangle both allow traders to profit from the resulting “vol crush” (volatility crush) that often follows earnings reports. 

Read: How the “Straddle” Strategy Can Tell Us The “Expected Move” Post Earnings. 

Straddles and Strangles FAQs

Option straddles are comprised of “at-the-money” options. Option strangles are comprised of “out-of-the-money” options. Since out-of-the-money options are cheaper than at-the-money options, the strangle strategy is cheaper to buy than the straddle strategy. 

The riskiest options trading strategy is the short call (naked call). Both the short strangle and short straddle contain a short call and therefore have considerable risk. 

The iron condor is not a straddle. Straddles are comprised of two options while iron condors are comprised of four options. The additional options in the iron condor strategy help to offset risk. 

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Mike Martin

Mike Martin

Mike was a writer for projectfinance. He has spent over 15 years in the finance industry, working for such companies as thinkorswim, TD Ameritrade and Charles Schwab. His work has appeared in the Financial Times, the Chicago Sun-Times, and The Buffalo News.

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