Options trading offers multiple strategies that allow traders to profit from market price fluctuations, regardless of whether prices move up or down. Two common strategies are the straddle and the strangle—both used when traders expect big moves in an underlying stock’s price but aren’t sure which direction it will go. While they may seem similar, each strategy has unique features and risks.
Understanding the difference can help you choose the right approach for your goals. In this article, we’ll break down straddles vs. strangles in a simple way.
A straddle is an options trading strategy where a trader simultaneously purchases a call option and a put option for the same underlying asset, with identical strike prices and expiration dates.
This approach is used when anticipating significant price volatility but is uncertain about the direction. The maximum potential loss is limited to the total premiums paid for both options, while the profit potential is theoretically unlimited, depending on the extent of the price movement.
Suppose an underlying stock is currently trading at ₹500. A trader implements a long straddle by purchasing a call option and a put option, both with a strike price of ₹500, each costing ₹20 in premiums. The total comes to (maximum possible loss) ₹40.
If the underlying stock rises to ₹560 at expiration:
If the underlying stock falls to ₹440 at expiration:
In both scenarios, the trader benefits from significant price movements in either direction.
Strangles combine the purchase of a call option and a put option that have the same expiration date but have different strike prices. Both options are out-of-the-money: the call’s strike price is above the current stock price, and the put’s strike price is below it. This strategy profits from significant price movements in either direction for an underlying asset.
Suppose an underlying stock is currently trading at ₹1,000. A trader anticipates substantial movement but is unsure of the direction. They implement a long strangle by:
The total premium paid is ₹70. If the underlying stock’s price moves significantly above ₹1,170 or below ₹830 by expiration, the trader stands to make a profit. You need to know this to learn option trading for beginners.
Now let’s discuss the key differences between straddle and strangle:
| Straddle | Strangle | |
| Strike Prices | Same for both call and put options. | Different, a call option has a higher strike price than the put option. |
| Option Premiums | Higher, due to at-the-money options. | Lower, as options are out-of-the-money. |
| Profit Potential | Profitable if the underlying asset moves significantly in either direction. | Requires a more substantial price movement than a straddle to become profitable. |
| Risk | Limited to the total premiums paid for the options. | Limited to the total premiums paid for the options. |
| Best Used When | Anticipating significant volatility but unsure of the direction. | Expecting significant price movement but with less certainty about direction and seeking a lower-cost strategy. |
Straddle and strangle are options trading strategies used to profit from significant price movements in either direction. A straddle involves buying a call and put option with the same strike price and expiration date, suitable for high expected volatility. A strangle uses options with different strike prices, offering a cost-effective alternative for moderate volatility expectations.
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