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How To Trade Straddle and Strangles Options Strategies ?

by Abhishek   ·  June 12, 2014   ·  

In our previous posts we have discussed the basics of options and some ignored but very important mathematical terms of options. Its now time to go ahead with options strategies. Today I will discuss two very popular option strategies called straddle and Strangle.

What is Straddle ?

When you buy both calls and puts on the same underlying at the same strike price and same expiry it is called a straddle. For example buying July month Nifty 7000 strike price both put and call options is straddle. 

What is Strangle ?

When you buy out of the money calls and out of the money puts on the same underlying at the different strike price and same expiry it is called a strangle. 
 

When to use straddle and strangle strategies ?

 
Both the above strategies are adopted when you expect a large price movement but don’t know in which direction. Since you buy both calls and puts, if there is a big movement either the calls or the puts will make a lot of money and loss on the other will be limited, hence you can profit from the strategy. 
 

Trading Straddle 

 
Lets say elections results are coming out next day. You know that if tomorrow a stable government is formed markets will go up and if not the markets can come down . If we assume nifty at 7050 , then with this straddle strategy you can buy both the put and call options of strike price 7000 or 7100. If there is big move in any direction you will make good profit. But if there is no big move Nifty neither moves up nor down  in such a case both calls and puts would loose value. 
 
A Strangle would be if you buy equal quantity of out of the money calls and puts. Since you expect to go either higher or lower by a very big amount.  Lets say Nifty at 7000 and following this strangle strategy you buy 6800 put option and 7200 call option.  Assume put at 50 and call at 40. If nifty goes up 300 points, 7200 calls might become 150 and 5800 puts might become 10, still giving you a net profit of 60, similarly if nifty goes down 300 points, you will net still make profits. The risk again would be if market doesn’t have a big price movement and remains flat, in such a case both the calls and puts will loose value. 
 

Difference between straddle and strangle 

 
When you take a straddle or a strangle, higher the price movement in either directions higher the profits. Difference is there only on the risk level. In straddle you buy nearly at the money options and are expensive. If they dont work in favor your risk is more.  In strangle you buy cheaper out the money options which has less to lose.  the risk is much higher in a strangle than a straddle if the market ends up remaining flat. Since in a strangle the options are out of the money, they would loose value faster. Also reward can be higher in straddle than strangles. 

 

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