Are you a trader in the US market? Then, you must be familiar with the very popular options strategies, straddle and strangle. These strategies help you to profit from the volatility of the market. Though both these strategies involve buying both call and put options, their execution and risk/rewards differ.
Hence, there is always a debate that out of straddle vs strangle, which one is the more appropriate approach while trading. Both these strategies are highly useful, and choosing one depends on your trading goals. To select the most apt strategy for you, you must first clearly understand these two strategies in detail, along with the similarities and differences between the two.
This MySpyOptions guide will take you through a detailed analysis of straddle and strangle, their advantages and disadvantages, and which strategy to choose out of straddle vs strangle.
What is a Straddle?
A straddle involves buying a call option and a put option with the same strike price and the same expiration date. It is used by traders when they expect a big price movement in either direction. For example, buying a call and put at $100 strike price is a straddle.
The advantages of straddle are:
- It is profitable if the stock moves sharply in either direction—up or down.
- It is simple to execute, as it has only one strike price.
- This strategy works well at the time of earnings announcements or news events.
The disadvantages of straddle are:
- It is expensive, as there is a higher combined premium cost.
- To make the trade profitable, there needs to be a significant price movement in the stock.
What is a Strangle?
A strangle involves buying a call option and a put option, but with different strike prices. Both options will have the same expiration date, as in case of a straddle. This strategy is employed by the traders when they anticipate volatility in the market but they want to reduce the upfront costs. For example, buying a call at $105 and a put at $95 when the stock is at $100 is a strangle.
The advantages of strangle are:
- It is cheaper than straddle since options are out-of-the-money.
- It provides flexibility in capturing market movement on both sides.
- The lower cost of this strategy makes it more accessible for small traders.
The disadvantages of strangle are:
- It requires an even larger price movement than straddle to become profitable.
- It is also more complex than straddle because you need to use different strike prices.
Straddle vs Strangle: Key Differences
The key differences between straddle and strangle are:
- Strike Price: Straddle uses the same strike price for both call and put, however, strangle uses different strike prices.
- Cost: Straddle is more expensive than strangle.
- Profit Potential: Both straddle and strangle benefit from the volatility of the market, however, for the trade to be profitable, there needs to be a lesser price movement in straddle than in strangle.
- Risk: In both cases, risk is limited to the premium paid, but the cost differs.
Straddle vs Strangle: Which Strategy Is Better?
The choice between the straddle vs strangle depends on how much risk you are ready to take, your budget, and your market outlook.
Straddle is recommended when:
- You are expecting a big move in either direction (up or down).
- You are okay with paying a higher premium for closer strikes.
Strangle is recommended when:
- You want a cheaper entry with reduced upfront cost.
- You are expecting a high volatility to cover the wider strike gap.
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FAQs
Q1: Which is safer, straddle or strangle?
Both straddle and strangle involve risk limited to the premium paid. However, strangle has lower upfront costs, and straddle needs lesser price movement to become profitable.
Q2: Can beginners use these strategies?
Yes, definitely. Beginners can use these strategies to up their options game, however, we advise that you practice with paper trading first before risking your real money.
Q3: When is the best time to use a straddle?
The best time to use the straddle strategy is at the time of earnings announcements, news events, and market uncertainty.
Q4: Why choose a strangle over a straddle?
A strangle is preferred over straddle when you are looking for a cheaper entry and have lesser capital.
Q5: Do both strategies profit if the market doesn’t move much?
No, both lose value if the underlying stock stays flat.