What Are Straddles and Strangles?
Straddles and strangles are volatility strategies that profit from large price moves in either direction. Trade them before events like earnings or when expecting volatility expansion/contraction.
Long Straddle
- Buy ATM Call + Buy ATM Put (same strike)
- Profits from big moves in either direction
- Max Loss: Premium paid
- Max Profit: Unlimited (up or down)
Long Strangle
- Buy OTM Call + Buy OTM Put (different strikes)
- Cheaper than straddle, needs bigger move
- Lower cost, lower probability
- Wider breakevens than straddle
Short Straddle/Strangle
- Sell options instead of buying
- Profit from low volatility / range-bound price
- Collect premium, keep it if stays near strike
- WARNING: Unlimited risk, advanced only
When to Buy Straddles/Strangles
- Before Earnings: Expect big announcement
- Low IV: Options are cheap relative to expected move
- Major Events: FDA approval, court decision, etc.
- Historical Movers: Stock has history of big moves
When to Sell Straddles/Strangles
- High IV Rank: >70%, expensive options
- After Earnings: IV crush opportunity
- Range-Bound Stock: Tight consolidation
- Near Support/Resistance: Price likely to hold
Managing Straddles/Strangles:
- Long: Exit at 50-100% profit, cut at 50% loss
- Short: Exit at 25-50% profit, roll if tested
- Earnings: Buy day before, sell immediately after
- Avoid: Holding long straddles into expiration