What is the difference between the options strategies: strangle and a straddle?
Discuss the benefits of each and provide an example.
Best Answer
991 points
rvilmur answered 2 years ago …
A straddle is a put and a call at the same strike price. A strangle has the put and call at separated strike prices.
If you are a strangle buyer you are taking a larger risk (debit to buy the options) than a strangle buyer. The strangle buyer has a larger potential reward window for taking the larger risk than the strangle buyer. So there is a risk/reward tradeoff to consider between the straddle and strangle.
If you are a straddle seller you have a greater maximum reward (credit for selling the options) but also a larger risk of losing all the reward and more if the stock moves too far from the strike price.
If you are a strangle seller, you have a lower maximum reward (less time premium sold) but also a lower risk that the stock will move outside of the strangle strike window to lower the reward or even go to a deficit.
Answers
4037 points
MNSL answered 2 years ago …
According to following website:
http://www.investopedia.com/ask/answers/05/052805.asp
Strangles and straddles are both options strategies that allow the investor to gain on significant moves either up or down in a stock’s price. Both strategies consist of buying an equal number of call and put options with the same expiration date; the only difference is that the strangle has two different strike prices, while the straddle has one common strike price.
For example, let’s say you believe your favorite diamond mining company is going to release its latest results in three weeks time, but you have no idea whether the news will be good or bad. This would be a good time to enter into a straddle, because when the results are released the stock is likely to be more sharply higher or lower.
Let’s assume the price is currently at $15 and we are currently in April 05. Suppose the price of the $15 call option for June 05 has a price of $2. The price of the $15 put option for June 05 has a price of $1. A straddle is achieved by buying both the call and the put for a total of $300: ($2 + $1) x 100 = 300. The investor in this situation will gain if the stock moves higher (because of the long call option) or if the stock goes lower (because of the long put option). Profits will be realized as long as the price of the stock moves by more than $3 per share in either direction. A strangle is used when the investor believes the stock has a better chance of moving in a certain direction, but would still like to be protected in the case of a negative move.
For example, let's say you believe the mining results will be positive, meaning you require less downside protection. Instead of buying the put option with the strike price of $15, maybe you should look at buying the $12.50 strike that has a price of $0.25. In this case, buying this put option will lower the cost of the strategy and will also require less of an upward move for you to break even. Using the put option in this strangle will still protect the extreme downside, while putting you, the investor, in a better position to gain from a positive announcement.
According to web site:
http://en.wikipedia.org/wiki/Strangle_(options)
The difference between a straddle and a strangle is the strike price of the options. In a straddle, the options are bought with the same strike price; in a strangle, the options are bought with different strike prices. This is used to bias the profitability of the strategy towards one particular direction of price movement in the underlying, while still offering some (reduced) protection against a movement in the other direction.
991 points
rvilmur answered 2 years ago …
In the second paragraph, a corrected second sentence is below:
The strangle buyer has a larger potential reward window for taking the larger risk than the straddle buyer.
991 points
rvilmur answered 2 years ago …
For the first rvilmur answer this is the second paragraph that I wanted. The second answer is still wrong.
If you are a straddle buyer you are taking a larger risk (debit to buy the options) than a strangle buyer. The straddle buyer has a larger potential reward window for taking the larger risk than the strangle buyer. So there is a risk/reward tradeoff to consider between the straddle and strangle
4037 points
MNSL answered 2 years ago …
I like to add some of benefits of above option strategies.
The short strangle has a lower potential profit than the short straddle, however it offers greater protection since the share price must move further to result in a loss.
A strangle benefits the buyer regardless of which direction the stock moves. These are good for trading around news.
