Straddles and Strangles

What this unit covers

Learn how a straddle and a strangle are built to profit from a big move in either direction, and what taking both sides' premium really costs.

By the end you will be able to

• Explain why a straddle or strangle bets on the size of a move, not its direction.
• Calculate the combined premium and the two breakeven points of a straddle or strangle.
• Compare a straddle and a strangle on cost and required move before choosing one.

How it starts: Waiting on the Results

1. A company you follow announces its results in three days.
2. You can buy a call and a put together instead of picking a side.
3. How far must the price move before that costs you nothing?

Words you will meet

Straddle

Buying a call and a put at the same strike price, betting on a big move in either direction.

Strangle

Buying a call and a put at different, wider strike prices, a cheaper bet needing a bigger move.

Premium

The price paid upfront to buy an option.

Breakeven point

The price at which a position stops losing and starts gaining.

Strike price

The fixed price at which an option lets you buy or sell the underlying.

In this module: Practical Option Strategies

1. Payoff Logic
2. Spreads
3. Straddles and Strangles (this unit)
4. Defined-Risk Structures and Strategy Limitations