Straddles, Strangles and What They Express

A straddle and a strangle both bet on a bigger move than the options market has priced in, at different costs and different breakevens.

A long straddle buys a call and a put at the same strike and expiry, and a long strangle buys a call and a put at two different strikes further from the current price, and both structures express the same underlying view: the stock is about to move by more than the options market is currently pricing in, without a strong opinion on which direction that move takes. The two structures differ mainly in cost and in how large a move is needed to turn a profit.

Using the $100 strike call at $5.20 and the $100 strike put at $2.79 on the $102 stock, a long straddle costs $5.20 plus $2.79, or $7.99. The position breaks even at $107.99 on the upside and $92.01 on the downside, meaning the stock has to move more than about 6 percent in either direction over the life of the trade before the position turns a profit.

If the stock finishes at $115, the call is worth $15 and the put is worthless, for a total value of $15 against the $7.99 paid, a profit of $7.01. If the stock instead pins exactly at $100 at expiry, both legs expire worthless and the full $7.99 premium is lost, which is the straddle's defining risk: it needs actual movement, beyond the mere possibility of movement, to pay off.

A strangle built with a $95 put and a $105 call on the same stock, priced illustratively at $1.95 for the put and $1.10 for the call given the way downside puts typically carry a richer premium than equidistant upside calls, costs $3.05 total, well under the straddle's $7.99. The breakevens sit further apart, at $91.95 on the downside and $108.05 on the upside, since the stock now has to clear the strike and then the premium on top of that.

If the stock finishes at $115, the call is worth $10 and the put is worthless, for a profit of $6.95 after the $3.05 paid, a smaller dollar profit than the straddle earned at the same stock price but on roughly 38 percent of the capital outlay. If the stock stays anywhere between $95 and $105 through expiry, both legs expire worthless and the full $3.05 is lost.