2. Straddles and Strangles
Straddles and strangles are both options strategies that allow an
investor to benefit from significant moves in a stock's price, whether the
stock moves up or down. ... The difference is that the strangle has two
different strike prices, while the straddle has a common strike price
3. Long Straddle
• By buying both the call and the put, you are spending money, buying
premium. You need stock to move significantly in either direction
and/or implied volatility to go up, all before too much time
passes. Your upside and downside profit potential are unlimited
(until stock reaches zero) and your maximum loss is what you paid for
the straddle.
6. Short straddle
• A short straddle, on the other hand, is a high risk position. As you can
see from the graph that losses are unlimited and profits max at the
price received for the sale of the straddle. Profits are only in the span
of up or down the price of the straddle from the strike.
7.
8. Long straddle and short straddle
Long straddle Short straddle
About strategy OTM call and Put option is bought
simultaneously with same
underlying asset and expiry date
and same exercise price
OTM call and Put option is sold
simultaneously with same
underlying asset and expiry date
and same exercise price
Market Neutral Neutral
Option type Call & Put Call & Put
No of Positions 2 2
Risk Limited Unlimited
Reward Unlimited Limited
Breakeven 2 2
9. Long Strangle (Buy Strangle) Short Strangle (Sell Strangle)
When to use? A Long Strangle is meant
for special scenarios where
you foresee a lot of
volatility in the market
due to election results,
budget, policy change,
annual result
announcements etc.
The
Shor
t
Stra
ngle
is
perf
ect
in a
neut
ral
mar
ket
scen
ario
whe
n
the
unde
rlyin
g is
expe
cted
to
be
less
volat
ile.
Market View NeutralWhen you are
unsure of the direction of
the underlying but
expecting high volatility in
it.
Neut
ralW
hen
you
are
expe
cting
little
volat
ility
and
mov
eme
nt in
the
price
of
the
unde
rlyin
g.
Action •Buy OTM Call Option
•Buy OTM Put Option
Suppose Nifty is currently
at 10400 and you expect
the price to move sharply
but are unsure about the
direction. In such a
scenario, you can execute
long strangle strategy by
buying Nifty at 10600 and
at 10800. The net
premium paid will be your
maximum loss while the
profit will depend on how
high or low the index
moves.
•Sell
OTM
Call
•Sell
OTM
Put
Sell
1
out-
of-
the-
mon
ey
put
and
sell
1
out-
of-
the-
mon
ey
call
whic
h
belo
ngs
to
sam
e
unde
rlyin
g
asse
t
and
has
the
sam
e
expir
y
date
.
Breakeven Point two break-even pointsA
Options Strangle strategy
has two break-even
points.
Lower Breakeven Point =
Strike Price of Put - Net
Premium
Upper Breakeven Point =
Strike Price of Call + Net
Premium
two
brea
k-
even
point
sA
stran
gle
has
two
brea
k-
even
point
s.
Low
er
Brea
k-
even
=
Strik
e
Price
of
Put -
Net
Pre
miu
m
Upp
er
Brea
k-
even
=
Strik
e
Price
of
Call
+
Net
Pre
miu
m"
Long Strangle (Buy Strangle) Short Strangle (Sell Strangle)
Risks LimitedMax Loss = Net Premium Paid
The maximum loss is limited to the net
premium paid in the long strangle strategy. It
occurs when the price of the underlying is
trading between the strike price of Options.
UnlimitedThe maximum loss is unlimited in this
strategy. You will incur losses when the price of
the underlying moves significantly either
upwards or downwards at expiration.
Loss = Price of Underlying - Strike Price of
Short Call - Net Premium Received
Or
Loss = Strike Price of Short Put - Price of
Underlying - Net Premium Received
Rewards UnlimitedMaximum profit is achieved when the
underlying moves significantly up and down at
expiration.
Profit = Price of Underlying - Strike Price of
Long Call - Net Premium Paid
Or
Profit = Strike Price of Long Put - Price of
Underlying - Net Premium Paid
LimitedFor maximum profit, the price of the
underlying on expiration date must trade
between the strike prices of the options. The
maximum profit is limited to the net premium
received while selling the Options.
Maximum Profit = Net Premium Received
Maximum Profit Scen
ario
One Option exercised Both Option not exercised
Maximum Loss Scena
rio
Both Option not exercised One Option exercised
10. Strangle
• Strangles have many of the same characteristics as straddles, but with
a larger margin of error. For a strangle you buy or sell both an out-of-
the-money call and an out-of-the-money put of the same expiration
but different exercise price. Thus the premium paid or received is
considerably lower than a straddle.
