In India, options trading offers traders different methods to make money from market changes. Straddle and strangle are two popular strategies used to take advantage of market volatility. This article looks at these strategies, their types, differences, benefits, and which one might suit your trading style the best.
What Are Straddle and Strangle?
Straddle
Buying or selling both a call and a put option with the same strike price and expiration date is called a straddle. This strategy is most effective when you expect a big price movement in the underlying asset but are not sure whether it will go up or down.
Strangle
Buying or selling a call option and a put option with different strike prices but the same expiration date is called a strangle. It costs less than a straddle and works well when you expect a big price change in the underlying asset.
Types of Straddle and Strangle
1. Long Straddle
- Setup: Buy a call and a put option at the same strike price.
- Objective: Profit from significant price movement in any direction.
- Risk: Limited to the premium paid.
- Reward: Unlimited potential.
Example: Long Nifty Straddle
- Nifty Spot Price: 23,200
- Buy 23,200 Call at ₹100.
- Buy 23,200 Put at ₹120.
- Total Premium Buying Price: ₹220.
- If the market is going 23,400, the call price will increase to 250 and the put price will be 50. then total exit price will be 300, and profit will be ₹(300 – 220) = ₹80
2. Short Straddle
- Setup: Sell a call and a put option at the same strike price.
- Objective: Profit from minimal price movement (low volatility).
- Risk: Unlimited potential losses.
- Reward: Limited to the premium received.
Example: Short Nifty Straddle
- Nifty Spot Price: 23,200.
- Sell 23,200 Call at ₹100.
- Sell 23,200 Put at ₹120.
- Total Premium Selling Price: ₹220.
- If the market is going 23,400, the call price will increase to 250 and the put price will be 50. then total exit price will be 300, and loss will be ₹(300 – 220) = ₹80
- [ If market going sideways approx 2 to 3 hours and after decaying current call premium ₹80 and put premium 90, then exit price will be ₹170, which is 50 rs less than selling price, that means 50 rs profit.]
3. Long Strangle
- Setup: Buy a call and a put option with different strike prices.
- Objective: Profit from significant price movement in any direction.
- Risk: Limited to the premium paid.
- Reward: Unlimited potential.
Example: Long Nifty Strangle
- Nifty Spot Price: 23,200.
- Buy 23,400 Call at ₹70.
- Buy 23000 Put at ₹110.
- Total Premium Paid: ₹180.
- If the market is going 23,400, the call price will increase to 210 and the put price will be 30. then total exit price will be 300, and profit will be ₹(240 – 180) = ₹60
4. Short Strangle
- Setup: Sell a call and a put option with different strike prices.
- Objective: Profit from minimal price movement.
- Risk: Unlimited potential losses.
- Reward: Limited to the premium received.
Example: Short Nifty Strangle
- Nifty Spot Price: 23,200.
- Sell 18,200 Call at ₹70.
- Sell 17,800 Put at ₹110.
- Total Premium Received: ₹180.
- If the market is going 23,400, the call price will increase to 210 and the put price will be 30. then total exit price will be 240, and loss will be ₹(240 – 180) = ₹60
- [ If market going sideways approx 2 to 3 hours and after decaying current call premium ₹50 and put premium 80, then exit price will be ₹130, which is 50 rs less than selling price, that means 50 rs profit.]
Key Differences Between Straddle and Strangle
| Feature | Straddle | Strangle |
| Cost | Higher (same strike prices) | Lower (different strike prices) |
| Risk-Reward | Larger breakeven range | Narrower breakeven range |
| Volatility Need | High | Moderate to high |
| Breakeven Points | Closer to current price | Wider from current price |
Understanding the Greeks: Delta, Gamma, Theta, and Vega in Options Trading
Advantages and Disadvantages
Advantages
- Profit in Volatile Markets: Both strategies can generate profits when markets experience large movements.
- Hedging: Useful for protecting portfolios during uncertain events.
Disadvantages
- Time Decay (Theta): Options lose value over time, especially when the market remains stagnant.
- Implied Volatility (IV): Sudden drops in IV can erode premiums.
- Higher Costs: Straddles can be expensive due to higher premiums.
Straddle or Strangle: Which Is Better for You?
Choose Straddle If:
- You expect significant price movement in the near term.
- You are willing to pay a higher premium for a tighter breakeven range.
Choose Strangle If:
- You expect moderate to high price movement but want to limit upfront costs.
- You are comfortable with a wider breakeven range.
Practical Scenario
- Before earnings announcement: Use a straddle for tighter breakeven points if volatility is expected to spike.
- Budget Impact on Markets: Use a strangle to capture broader price movements with reduced initial costs.
Conclusion
Options traders should learn how to use the choke and strangle strategies because they allow for flexibility in taking advantage of market changes. A strangle is a cheaper option with slightly lower risk compared to a straddle, making it a good choice when expecting high market volatility. Before choosing the strategy that fits your trading goals, consider your risk tolerance, market expectations, and costs.