Today, let’s look at the difference between straddle and strangle, two of the most common and popular options strategies. Both strategies involve purchasing an equal quantity of call and put options with identical expiration dates. But one has two different strike prices, whereas the other has a common strike price. Curious? Read on!
Straddle
- A method for a trader to capitalize on the price fluctuations of an underlying asset.
- The straddle gains value when the stock price rises (due to the long call option) or falls (due to the long put option).
- Costs more for the buyer. The seller receives a higher premium.
- Applicable when the direction of price movement is uncertain.
Strangles
- A strangle is employed when an investor anticipates a stronger likelihood of the stock moving in a specific direction but seeks protection against an adverse price shift.
- Employing the lower-strike put option in this strangle protects against significant downside risk while positioning you to benefit from a favorable announcement.
- Costs less for the buyer. The seller receives less premium.
- Suitable for scenarios with both uncertain and anticipated price movement directions.
Choosing the right strategy can make or break your trade. Stay tuned for more strategy insights.
Disclaimer: LinkedIn