Straddles and Strangles: Betting on a Big Move
Not sure whether it'll go up or down, only that it'll move a lot? Buy a call and a put together. Same strike is a straddle; different strikes is a strangle.
Risk warning: forex, CFDs, options, futures and crypto assets usually involve leverage or high volatility, and you can lose more than you put in. This lesson only teaches the concepts; all numbers are for illustration and are not investment advice.
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Text version · Advanced Option Strategies, lesson 5: “Straddles and Strangles: Betting on a Big Move”
Not sure whether it'll go up or down, only that it'll move a lot? Buy a call and a put together. Same strike is a straddle; different strikes is a strangle.
Bet on volatility, not direction
Buying a straddle: buy a Call and a Put at the same strike. A big rise and the Call pays; a big drop and the Put pays. The only fear is no movement.
Strangle: cheaper, needs a bigger move
A strangle splits the two strikes apart, both out of the money: it costs less, but the stock has to move further to break even. Selling them instead is a bet that it “won't move”.
Time is the buyer's enemy
A long straddle holds two options, so it pays two lots of Theta. If the stock stalls, time value drains away twice as fast every day. The big move had better come early and hard.
Key takeaways
- Long straddle: buy a call and a put at the same strike. A big move in either direction makes money.
- A strangle spreads the two strikes apart. It costs less but needs a bigger move to break even.
- Selling a straddle or strangle bets on "no move": limited income, potentially unlimited risk.
- A long straddle pays time decay on two options, so the later the big move comes, the worse it is.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Long straddle: what are the two breakeven points? How do they relate to the premium you paid?
- Drag “Elapsed” to 20 days and leave the stock at $100: how much did you lose? That's time value draining away.
- Switch to the long strangle, then increase “How far the short legs are from the current price”: how do the cost and breakeven points change?
- Switch to the short straddle and drag the stock to $60: how much did you lose? Where is the seller's risk?
Quiz and explanations
- 1. You buy the 100 straddle for $9 in total. What are the breakevens at expiration?
- Answer: $91 and $109.Downside 100 − 9 = 91, upside 100 + 9 = 109.
- 2. Compared with a straddle, a strangle is…
- Answer: Cheaper, but needs a bigger move.Both strikes are out of the money, so the premium is lower, but the stock has to travel further.
- 3. You buy a strangle: the 95 put ($2) + the 105 call ($2.5). At expiration the stock is $112. What's your P&L per share?
- Answer: +$2.5.The call has $7 of intrinsic value and the put expires worthless; minus the $4.5 total cost, that's a net gain of $2.5.
Terms in this lesson
- breakeven (Breakeven): The underlying price at expiration where you neither make nor lose money.
- implied volatility (IV) (Implied Volatility (IV)): The volatility backed out of an option's market price, reflecting the market's expectation of future swings; the higher the IV, the pricier the option.
- net premium (Net Premium): Premium paid on long legs minus premium received on short legs; paying net is a debit, receiving net is a credit.
- probability of profit (Probability of Profit): The estimated chance a position makes money at expiry based on current implied volatility; it's a model estimate, not a guarantee.
- straddle (Straddle): Buying (or selling) a call and a put at the same strike; a long straddle bets on a big move, a short straddle bets on no move.
- strangle (Strangle): Buying (or selling) an out-of-the-money put and call at two separate strikes; cheaper than a straddle but needs a bigger move.
- Theta: How much value an option loses with each passing day; the decay speeds up as expiration nears.