Straddles and strangles are both pure volatility trades. The idea is simple: The more the stock moves, the better the position can work. The difference comes down to cost, risk and how much movement you actually need.
A straddle uses the same strike for the call and put, which keeps the trade centered and neutral but makes it more expensive. A strangle uses out-of-the-money strikes, lowering the upfront cost but requiring a bigger move to work. Sometimes the decision is practical too, since not every stock has a strike exactly at the money. No matter which structure you use, volatility matters. These trades tend to make more sense when implied volatility is low relative to recent movement, not when options are already expensive.
Options involve risk and are not suitable for all investors. Before trading options, please read Characteristics and Risks of Standardized Option (ODD) which can be obtained from your broker; by emailing investorservices@theocc.com; or from The Options Clearing Corporation, 125 S. Franklin St., Suite 1200, Chicago, IL 60606. The content posted by our authors is intended to be general education and / or general information in nature. We are NOT providing advice for any individual trader. No statement made by our authors or subscribers is intended to be a recommendation or solicitation to buy or sell any security or to provide trading or investment advice. Traders and investors considering options should consult a professional tax advisor as to how taxes may affect the outcome of contemplated options transactions. Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing one’s financial security or lifestyle. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.
