Straddle vs. Strangle Options: Which Strategy Suits You Better?

Calls and puts can be some of the most effective investment strategies available. However, managing options can be a little tricky for the novice trader. If you don't fully understand how they work, you can lose a lot of money. Two of the most important strategies you'll need to understand are straddle options and strangle options. This guide will explain the difference between straddle and strangle options and help you figure out the best choice for your situation.

Key Takeaways:

• Straddle options are a type of investment strategy that involves working simultaneously with a call and put that have the same expiration date and strike price.
• Strangle options are an investing strategy that involves managing call and put options with different strike prices and the same expiration date. In a strangle, the options are both out-of-the-money, so they're cheaper, but less likely to reach their strike prices.

What Are Straddle Options?

Long Straddle

You start creating a long straddle by purchasing both a long call and a long put that have the same expiration date, and a strike price close to the security's current market price. 

If the price of the underlying security increases or decreases by a significant amount, you make money. If the same underlying asset stays around the same price, the call and put help offset each other to minimize your total loss. To make money on a long straddle, you need the price of the asset to move enough that it exceeds the combined cost of both your call and your put.

Short Straddle

A short straddle involves selling a call and a put that have the same strike price and expiration date. Short straddles are a popular choice when the market isn't moving much and there’s little volatility. The overall maximum profit for a short straddle is equal to the total premiums for the options, and can be earned by holding the short straddle until it expires. 

Short straddles are less popular than long straddles, because if there‘s volatility, the maximum risk for a short straddle is unlimited.

Advantages of Using a Straddle Options Strategy

When should you try using straddle options? The strategy can be very helpful in certain situations. Here are some of the advantages of working with straddle options. 

Flexibility in an Uncertain Market

The biggest perk of a straddle option is that you don't have to predict whether the price of the same underlying asset will increase or decline. Since you have both a call and a put, straddle options cover your position, no matter what happens. Especially with a long straddle in a volatile market, you can get very impressive returns, irrespective of the direction in which the market ends up moving. 

A straddle essentially lets you bet that the market will change — without having to know how it will change.

Doubled Income

A helpful perk of short straddle options is that you're actually selling two options instead of one. This means that you can make quite a bit of extra money. Instead of earning only a single premium, short straddles let you potentially double your earnings. This usually only happens if the market remains very stable when you purchase your options, but it's still quite useful.

Disadvantages of Using a Straddle Options Strategy

Despite their many perks, straddle options aren't perfect. In some situations, you can run into the following issues.

Pricey to Enact

Especially if you aren't buying at-the-money options, straddle options can be expensive. You'll need to have enough funds to purchase multiple options if you want this strategy to work. If you’re working with limited funds, straddle options usually aren't a good choice. They tend to be more popular among big investors who have thousands of dollars to play around with. 

Potential for Unlimited Losses

If you're using a short straddle, you need to be cautious, because if the price of the asset drastically rises or drops before you can sell your options, you could end up with major losses. Theoretically, short straddles predispose you to an unlimited amount of loss. People who make poor decisions while enacting a short straddle can end up losing a lot of money. 

What Are Strangle Options?

Long Strangle

In a long strangle, you buy an out-of-the-money put and an out-of-the-money call. The two options have similar breakeven points and an identical expiration date. Since you buy and exercise both, it doesn’t matter which way the market moves. As long as there’s enough volatility to cause a drastic change, you’ll profit. 

Long strangle options have theoretically unlimited maximum profit. The only thing you risk losing is the initial cost of getting the options in the first place. 

Short Strangle

A short strangle occurs when you simultaneously sell an out-of-the-money put and an out-of-the-money call. As long as the price of the underlying asset remains stable, this strategy provides a small amount of profit. However, if there’s a lot of significant price movement in the market, short strangle options can expose you to an undefined amount of loss.

Advantages of Using a Strangle Options Strategy

Strangle options provide investors with several perks, and using this strategy lets you enjoy these benefits. 

Very Affordable

One of the main reasons people choose strangle options is to save money. Unlike some other investment strategies, you don't have to use large sums of money just to turn a small profit. Instead, you can start a strangle even if you don't have a lot of capital on hand. Since the strike price for the options isn’t close to the price of the underlying security, they're not very pricey to purchase in the first place.

Can Result in Impressive Profits

If you choose a long strangle, you get unlimited profit potential. There are many examples of investors using strangles to make a few simple purchases, and receiving tremendous returns. Since they have unlimited profit potential, a significant price movement can result in a large profit. If you like the idea of making a low-risk decision with high reward potential, a strangle might work well for you.

Disadvantages of Using a Strangle Options Strategy

Though strangle options are popular, they're not entirely foolproof. Here are some examples of ways they can cause problems for investors.

Only Works With Specific Market Movements

When you're working with long strangle options, keep in mind that you need the market to be quite volatile. A small price increase or decrease won't be enough to make this strategy pay off. If the market stagnates for a while, you can lose all of your money. The only way for a long strangle to be effective is if significant market movements are occurring. Meanwhile, a short strangle is the exact opposite, as market volatility can cause the loss of your money. 

If you want to make a profit, you'll need the market to remain fairly stable.

Finding the Right Options Can Be Complicated

With a strangle, you're purchasing out-of-the-money assets, so you have many different options to choose from. Instead of being a relatively straightforward investment, you'll need to take the time to look at the delta for each option, and see how far away its strike price is from the price of the underlying asset. Long strangles typically benefit from high delta, while short strangles benefit from low delta. However, different strike prices can result in different potential profits.

Straddle vs. Strangle Options: The Similarities

Straddles and strangles have a few things in common. Both of these trading strategies use the underlying concept of simultaneously working with both a call option and a put option, and there are also some similarities in the way that each of these tactics functions. 

When it comes to straddle vs. strangle options, here's what you need to know.

Both Long Options Let You Profit From All Types of Volatility

Whether you have a long straddle or a long strangle, you can profit from any volatility in the market. Both of these trading techniques let you profit, as long as the market makes sudden movements. Regardless of whether you pick long straddle options or long strangle options, you'll make money when prices go up or down. 

The great thing about both of these investment strategies is that it doesn't matter whether the asset price rises or lowers. You just have to accurately predict that there will be price movement. You don't need to predict which way the market will be going.

Both Straddles and Strangles Let You Hedge Your Bets

Straddle options and strangle options are ideal for the cautious trader. Essentially, they’re a way for careful traders to protect themselves from the unexpected. For example, if a trader has a generally bullish outlook on crypto prices, but knows that there might be some dips in the near future, straddles or strangles let them protect their overall position.

Straddle vs. Strangle Options: The Differences

Though straddles and strangles have some theoretical similarities in the way they work, on a practical level they're quite different. Here are some of the main reasons straddles and strangles aren’t identical.

Strike Prices Are Drastically Different

The main factor that differentiates straddle and strangle options is their strike price. While they always have a similar expiration date, their strike price varies. Straddle options always have the same strike price, while strangle options have different strike prices. 

The other big difference is that strike prices for a straddle are at-the-money, while strangle options are out-of-the-money. With a straddle, you work with calls and puts that have a strike price close to the underlying asset price. In a strangle, the strike price will be far from the underlying asset price.

Strangles Are Much Cheaper Than Straddles

Both options strategies can result in fairly similar types of profit. However, one of the key differences between strangle and straddle options is that strangles are a lot cheaper to enact. An at-the-money asset tends to sell for a lot more, so it can be costly to achieve the right calls and puts for straddle options. Meanwhile, strangle options use discounted calls and puts, so they're a lot cheaper. 

Straddles Have Less Directional Bias Than Strangles

Another key difference to be aware of is how each strategy responds to price movement. Straddles are a fairly neutral type of investment strategy. Since they have the same strike price, it won't matter which way the market moves. You get the same level of profit whether the stock price goes up or down. With strangles, however, investors do have the option of remaining relatively neutral and picking calls and puts that have a similar amount of delta. 

However, you don't necessarily have to do that. You can choose to pick one option with a strike price closer to market value, and one option with a strike price much farther away from market value. This approach can let you earn more if the market moves in a particular direction. It can be quite useful if you're fairly certain the market is moving a certain way, but want an extra option — just in case the market does something unexpected.

How to Choose a Suitable Options Strategy

Both straddle and strangle options trading strategies work well in certain situations. However, due to the differences between straddle options and strangle options, certain techniques work better in specific circumstances. Following are some of the factors to consider when choosing between a strangle and a straddle.

• Your budget: Since strangles are always cheaper than straddles, they're a better option if you don't have a lot of money to invest. 
• Market volatility: Strangles need more market volatility to work well, so they're usually only an effective choice if the market moves around a lot.
• Market predictability: Since strangles have the option of adding directional bias, they may be a better choice if you’re confident which way the market is going to move.
• Risk tolerance: When working with short strangles and short straddles, keep in mind that potential loss is undefined. However, short straddles have a narrower window before loss starts to accumulate, so they're a little riskier.
• Ability to research trends: When working with strangles, you have to consider how different the options price is from the underlying asset price. Straddles can be easier if you don't like doing this extra work.

Which Options Strategy Is Better Suited for You?

The right choice really just comes down to market circumstances and your personal preferences. You'll first need to consider what you want to get out of straddle or strangle options trading strategies. Do you want a budget-friendly trade? In that case, a strangle is a better option. Are you an expert trader who’s comfortable with riskier choices? In that case, you might prefer straddles.

Also, think about how the market is currently doing. If the market seems highly volatile, strangles work well. However, if you think the market will only move a little, a straddle might be the better option. Technically, either style can provide profit, no matter how the market moves. 

However, if you think it's far more likely that the market will move in a certain direction, a strangle can be more helpful. You'll need to be comfortable adjusting your trading style to account for these sorts of market trends.

The Bottom Line

Ultimately, strangle options and straddle options can be a neat way to work with options while offsetting some of the risks. Though these methods aren't 100% foolproof, they can offer mitigated risks and unlimited profits, and a smart investor who chooses the right strangle or straddle technique can make an impressive amount of money from trading calls and puts.

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