Make the Call: Straddles vs. Strangles Options Trading Strategies

Straddles and strangles are typically considered advanced options trading strategies, but don’t let that deter you from giving them a shot. Investors use strangles when they predict that the price of an asset will drastically change up or down but aren’t sure which direction.

Here’s how investors might determine which is best for a particular situation. But first, let’s dive into the fundamentals.

A straddle is a type of options trading strategy. But if you’re wondering what options trading is, then you’re not alone. It’s often considered a more advanced (and riskier) type of investing.

At its core, options trading is buying contract that gives investors the opportunity to buy or sell an asset, like stocks, at a certain price and specific date.

Investors don’t even need to own the underlying asset—which can range from bonds, stocks, currencies, and commodities—to partake in options trading.

Straddles are used when investors believe that an underlying asset is going to move up or down but aren’t sure of the direction. 

The same expiration date

In order to set up a straddle, investors buy a call and put option at the same strike price and with the same expiration date. These are usually purchased at-the-money.

The investor is predicting that the price of the underlying asset will change, either up or down, before the expiration date.

A straddle means betting that the asset will go up or down in value enough that an at-the-money call or at-the-money put will be worth more than what the investor paid in premiums to purchase them. 

Straddles are predictions

That might sound complicated, but straddles are ultimately a prediction about the price volatility of an asset.

As long as that asset increases or decreases in value more than what the investor paid to purchase the contract, then the investor profits.

Like most investments and options trading strategies, there’s no guarantee that you'll make money. But, a lot of investors consider straddles to be less risky than other types of options trading.

For investors who are comfortable with some risk, enjoy following the markets, and regularly pay attention to things like company earning calls, then setting up a straddle might be tempting. 

Here are some of the potential benefits of a straddle.

Investors need to account for the loss of the purchase price when determining their profit. Unlike other investment strategies, straddles will always include a loss, even if they are profitable.

Strangles are another type of options trading strategy. At first glance, strangles seem remarkably similar to straddles. But when you take a closer look, there are some noteworthy differences.

To set up a strangle, an investor buys a call option that is higher than the current market price, and they buy a put option that is lower than the current market price. Both are purchased for the same underlying asset and with the same expiration date, but the strike prices are different.

Investors utilize strangles when they predict that the price of the underlying asset will swing drastically in one direction or another.

Similar to a straddle, it doesn’t matter which direction it moves. It only matters that it happens. 

With a strangle, an investor is betting that the underlying asset price will swing above the call price or swing below the put price.

Depending on which one occurs, the options contract could then allow the investor to purchase additional assets at a price below current value or buy at current value and sell for a profit. Either way, the investor is hoping for movement in value.

The strategies for straddle and strangle options are similar in the sense that the investor is making a bet about how the value of an underlying stock will change.

But determining which one to utilize depends on factors like the investor’s goals, available capital, and predictions about the specific asset. 

Predict the future stock price

Both with straddles and strangles, investors are making predictions about the future.

Investors are betting that the price of the underlying stock will swing up or down within a specific timeframe. There aren’t any guarantees, but for a lot of investors, that’s part of the appeal.

Direction doesn’t matter

Both strategies require movement, but the direction doesn’t matter. That’s due to the fact that straddles and strangles involve buying both a call option and a put option on the same asset. Because of that, movement is the ultimate goal.

Same expiration date

Call and put options contracts for straddles and strangles have the same expiration date. This means that the price movement of the underlying stock is time sensitive in both strategies. In other words, investors need to have a clear timeline for their prediction.

If you're going to utilize the stangle or straddle strategies, you need to know what sets them apart. Here are the main distinctions between the stangle vs staddle options trading strategies.

Same strike price vs different strike price

One of the biggest differences between straddles and straddles is the strike price. With a strangle, the strike prices are different.

With a straddle, the strike prices are the same. This might sound like a small difference, but it actually determines what (and how) the investor makes their prediction.

Amount of change

Strangles are out-of-the-money options which means that they are generally cheaper to set up, but it also means that they require significant price movement in order to be profitable.

Straddles also require movement, but the movement doesn’t need to be as drastic.

Cost of setup

It’s usually cheaper to set up a strangle than it is to set up a straddle. That’s largely due to the fact that strangles require more movement to be profitable while straddles require less movement.

In other words, it’s often considered easier for a straddle to be profitable since less market volatility is needed. As a result, it costs more to set up.

Let’s imagine COIN is trading at $30, and an investor wants to set up a strangle. The investor decides to place a strike price for the call at $50 and also places a strike price for the put at $10.

Cost to set up

The premium for the strike-call is $2 ($2 x 100 shares = $200), and the premium for the strike-put is $1 ($1 x 100 shares = $100).

The investor would pay a total of $300 in premiums in order to set up the strangle ($200 + $100 = $300).

Potential profit

But if the value of COIN rises above the strike price for the call or falls below the strike price for the put, then it gets interesting.

In this scenario, let’s imagine COIN shares a public quarterly report revealing that the company is releasing a new product and earnings have been higher than expected.

As a result, the value of COIN jumps to $80 before the contract’s expiration date. This means that the value of the call option would expire at $800.

This is good news for the investor because he or she would earn a total profit of $500 ($800 - $300 premium costs = $500).

Let’s imagine that a different investor wanted to set up a straddle for COIN when it’s trading at $30.

This investor purchases an at-the-money strike-call with a $4 premium ($4 x 100 = $400) and an at-the-money put-call with a $5 premium ($5 x 100 = $500). The total cost to set up the straddle would be $900 ($400 + $500 = $900).

Let’s say that COIN shares a quarterly report and the value of COIN dramatically rises to $80 before the contract’s expiration date.

This means that the call-option might now be valued at $50, which would provide a total value of $5,000 for the call contract ($50 x 100 = $5,000).

In this example, the investor would receive a total profit of $4,100 ($5,000 - $900 premium cost = $4,100).

When it comes to deciding between a straddle and a strangle, it’s important to start by reviewing your goals.

Here are some questions investors might want to consider:

• How confident are you that the price of the underlying stock price will dramatically increase or decrease during a specific timeframe?
• Do you predict a quarterly meeting or a major macroeconomic event within that timeframe?
• How much money you're comfortable spending to set up the options contract?
• What is your goal with the options contract? At first glance, it might seem like the only possible goal is to profit. But perhaps you want to explore trading options, learn more about the process in a hands-on way or diversify your investment strategies.

Once you're clear on your goals and purpose, it’s time to explore different investing platforms.

Before you can decide whether you want a strangle or straddle, the first decision you need to make is what platform to use.

There are a few different options you might want to consider.

Public is a platform that lets you invest in any fractional asset and also provides analytics and insight all in one place.

You can keep it simple with M1 and invest, borrow or spend with this robo-advisor platform.

Whether you’re interested in stocks, futures, ETFs, or crypto, Tradestation has it commission-free.

With a motto of “investing for everyone,” Robinhood allows for unlimited, commission-free trades in a variety of assets.

Are straddles or strangles more profitable? 

Strangles have more profit potential than straddles but greater risk because of the spread between strike prices. Strangles are constructed by buying an out-of-the-money call and an out-of-the-money put with the same expiration date but with different strike prices. They have the potential to be more profitable because they cost less than straddles, but they have a narrower range of profitability. Straddles involve buying an at-the-money call and an at-the-money put with the same expiration date, and they cost more but have the potential for greater profits because of the wider range of profitability.

What is the difference between a straddle and a strangle?

A straddle involves buying an at-the-money call, and an at-the-money put with the same expiration date. Straddles have a wider range of profitability and cost more than strangles. A strangle is buying an out-of-the-money call, and an out-of-the-money put with the same expiration date but with different strike prices. Strangles have a narrower range of profitability but cost less than straddles.

Why is strangle cheaper than straddle?

Strangles are typically cheaper than straddles because the strike prices of the options used in a strangle are further away from the underlying asset's current price than the strike prices of the options used in a straddle. Since the strike prices of the options used in a strangle are further away from the underlying asset's current price, they cost less than the options used in a straddle.

What are long straddles and strangles?

Long straddles and strangles are option trading strategies designed to profit from directional movements in the underlying asset's price. With a long straddle, the investor buys an at-the-money call and an at-the-money put with the same expiration date. With a long strangle, the investor buys an out-of-the-money call and an out-of-the-money put with the same expiration date but with different strike prices. In both strategies, the investor profits if the underlying asset's price moves past the strike price of either the call or the put

Which is safer straddle or strangle?

Straddles are generally considered to be safer than strangles because they have a wider range of profitability and cost less than strangles. However, the overall risk of each strategy depends on the underlying market and the specific options traded. Both strategies can be used to take advantage of directional price moves but can also expose traders to significant losses if the underlying asset does not make a big enough move in the predicted direction.

Are option straddles risky?

Yes, options straddles are risky. Buying an at-the-money call and an at-the-money put with the same expiration date carries the risk of losses if the underlying asset does not make a large enough move in either direction. Additionally, if the market is volatile, both the call and the put can be exercised, resulting in a loss. Therefore, it is important for traders to understand the risks and limitations of options straddles before trading them.