Straddle vs Strangle (What Are The Differences: Overview)

What is the difference between a Straddle vs Strangle?

How do these option strategies work?

What are the essential elements you should know!

Keep reading as we have gathered exactly the information that you need!

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What Is The Difference Between Straddle vs Strangle

The “straddle” and “strangle” terms refer to options trading strategies intended to take advantage of the volatility or movement of the underlying stock price.

The way an investor would set up a straddle or a strangle investment strategy is by purchasing call options and put options with the same expiration date.

A straddle strategy will require that the put options and call options have the same strike price and expiration date whereas a strangle strategy will require the options to have different strike prices.

What’s notable is that both the straddle and strangle methods allow an option trader or investor to earn a profit from the significant movement of the underlying stock price no matter if the price goes up or down.

What Are Options

Options are considered derivative securities where the option holder can earn a profit or suffer a loss depending on the movement of the price of an underlying asset.

For example, the value of options linked to stocks trading in the stock market will depend on the value of the underlying stocks.

The reason why it’s called an “option” is that the option holder has the “option” or “right” to decide to exercise the rights associated with the options contract.

If the option is exercised, the seller of the option must then respect the terms of the option contract commitment which is generally to buy from or sell to the option holder the underlying asset.

What Is A Straddle

A “straddle” is an option strategy where the investor predicts that the price of a stock will fluctuate by a specific point in time.

For example, publicly traded companies are required to publish their quarterly financial statements.

Generally, if the result is good, the stocks will increase in price whereas if the results are bad the stock price will drop.

If an investor cannot predict if a company’s stock will go up or down but knows there will be important fluctuations when it releases its financial statements, the following straddle can be structure:

• A call option is purchased having an expiry date for shortly after the date the company is expected to release its financial statements 
• A put option is purchased with the same expiration date and strike price as the call option

If the stock price goes up, the value of the call option goes up and the put options become worthless.

If the stock price goes down, the value of the put option goes up and the call options become worthless. 

The investor will make a profit if the value of the in-the-money option exceeds the premium paid to purchase the two option contracts.

What Is A Strangle

A strangle is a different type of option strategy where the investor or trader bets or predicts that the stock price will move in a specific direction (up or down).

If the investor believes that a company’s stock price will move up, then he or she would purchase the following option contracts:

• A call option with a specific strike price and expiration date to take advantage of the upward movement of the stock
• A put option will be purchased with the same expiration date but a lower strike price to provide some protection in case the stock price goes down 

With this strategy, if the stock price goes up, the trader will earn a profit by having the call options worth more than the premiums it paid to purchase the two option contracts.

Strangle vs Straddle Option Strategy 

How does an investor decide if they will adopt straddles vs strangles?

The objective of implementing a strangle or straddle is to take advantage of the movement of stock prices for a particular security.

Straddles are good strategies to adopt when the investor does not know in what direction the underlying stock price may move.

On the other hand, strangles are great strategies when the investor can predict in which direction the stock will move, up or down.

In a straddle position, the investor holds a call and put option that is “at-the-money” whereas in a strangle position, the investor holds a call and a put option that is “out-of-the-money”.

Trading options and derivative securities is not something that a beginner in investing may be comfortable doing.

An investor must be knowledgeable of the strategies, risks, and tax consequences of the strategies adopted to truly earn a profit.

Engaging in options trading without a clear overall plan or understanding can lead to the risk of important financial loss.

As a result, it’s important to consult with an investing professional or advisor before engaging in any options trading.

Strangle vs Straddle Advantages and Disadvantages

There are pros and cons in dealing with option strangle vs straddle techniques.

If you buy a straddle (or go long), here are the considerations:

• The advantage is that it can earn you an unlimited profit in a volatile market and minimize loss
• The disadvantage is that the price change of the underlying stock has to be significant to earn decent profits

If you buy a strangle (or go long), here are the considerations:

• The advantage is that you can earn an unlimited amount of profits
• The disadvantage is that you’ll need to adequately predict the actual movement of the stock and the stock price must move significantly in the predicted direction to earn decent profits 

Options Straddle vs Strangle Examples

Let’s look at an example to better understand the concept and how the straddle vs strangle strategies work.

Example of Straddle

Let’s assume that Company ABC is expected to release its quarterly report in three weeks.

Investors don’t know if the announcement will be good or bad for the stock price but are confident that the stock price will fluctuate significantly.

In this case, we’d go with a straddle option strategy.

Here are some key data points:

• Company ABC’s stock price is now $50
• Call options on Company ABC stock with a $50 strike price is $5
• Put options on Company ABC stock with a $50 strike price is $3

Let’s assume that in two months, Company ABC’s stock is worth $70.

In this case, the call option can be exercised to purchase the stock at $50 and sell it on the market at $70 earning the option holder $20 per share.

The put option will be worthless.

The investor’s profit per share is therefore the profits earned by exercising the call option ($20) and the cost of purchasing the option contracts ($8).

In our example, it’s a profit of $12 per share.

Example of Strangle

Let’s also assume that Company ABC is expected to report on its earnings in three weeks but, this time, investors expect an increase in the stock price.

Now, we can go with a strangle as we want to take advantage of the upside and get some protection on the downside.

Here are some key data points:

• Company ABC’s stock price is now $50
• Call options on Company ABC stock with a $50 strike price is $5
• Put options on Company ABC stock with a $50 strike price is $3
• Put options on Company ABC stock with a $30 strike price is $1

Now, we’d buy a call option with a $50 strike price and a put option with a $30 strike price.

The total cost to purchase the option contracts is $6.

If the stock price goes to $70, the investor would exercise the call option at $50 per share and sell the shares in the market at $70 earning $20 per share.

In this case, the profits will be slightly higher than in a straddle as it costs the investor less to purchase the option contracts ($6 instead of $8).

The trader’s profit is therefore $14.

Straddle vs Strangle Options Takeaways 

So what is the legal definition of Straddle vs Strangle?

Let’s look at a summary of our findings.

Straddle vs Strangle

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