Straddle vs strangle strategies are very important to understand. They are two of the best and most widely used options strategies. Both strategies focus on maximizing profits when stock prices move up or down. Both rely on buying equal numbers of call and put options with the same expiration date.
Definition of Investment Terms
We just threw out a lot of important terms. So before we go any further, let’s take a moment to understand what these terms mean. First, options are contracts that allow but do not obligate a person to either buy or sell an asset by a predetermined asset by a pre agreed upon date. This date is referred to as the expiration date. The agreed upon price is called a “strike” price.
A call option allows but does not obligate a trader to buy a certain asset at an agreed upon price on or before a particular date. A put option, on the other hand, allows a trader to sell a certain asset at a pre-agreed upon price by a certain point in time in the future.
Straddle vs Strangle Strategies: How to Tell the Difference
As with any type of financial trading, there are a lot of different strategies when it comes to trading options. As we already mentioned, straddle and strangle trading strategies are among the most common types of trading strategies. Let’s dig into what these two strategies are and perhaps most importantly, what the differences are.
A straddle position refers to a position in which a trader will buy both call and put options with the same strike price and same expiration date. Traders will only make money if the stock or other underlying asset for the option makes a big move. However, it won’t matter which way prices move. Whether prices rise or drop, the trader will make money.
Big gains and big drops will earn the trader money either way because the options will allow the trader to buy or sell their stocks at predetermined prices. A straddle option strategy is thus a great strategy for traders who believe assets will post big moves, but aren’t sure which way they will move.
A strangle option strategy is very similar to a option straddle, but has two different strike prices. The trader still buys both call and put options, however. By purchasing the options at different strike prices, the trader can actually save a bit of money that is paid for the options themselves. An options strangle is a bit higher risk, however. That’s because the differing strike prices make it slightly more difficult to produce a profit.
You should consider an option straddle or option strangle when markets or particular assets are very volatile. Volatility will result in big price swings. Big price swings will create opportunities for traders to make a lot of money.
Both of these strategies are frequently used by professional traders because they offer great opportunities to produce a lot of money. You should take some time to familiarize yourself with both of them and consider using them when conducting your own trading.
These strategies are a bit advanced, and options trading in general is a high risk, high reward endeavor. With options often you either make money, or you lose all the money you invested. That’s because options have an expiration date. If you don’t exercise your long straddle or strangle option or any other type of option, it becomes worthless. Make sure you keep that in mind when buying options.
We certainly don’t mean to discourage you from option trading, however. With prudence, options trading can be among the best and most profitable types of financial trading. Just make sure you use caution and invest wisely. Of course, the same is true of every investment type.