Learn With ETMarkets: Options Demystified 505 - Strangle and Short-strangles
Long and Short Straddles, aiming to profit from both high and low-volatility scenarios. Read Here — Options Demystified 504
Now, Tara had a burning question following that conversation.
She turned to Maya and asked, «Let's say we're gearing up for some major economic event, and we're foreseeing wild market swings ahead – you know, high volatility. Now, in such a case, won't the option prices shoot up due to this volatility surge? And if we go for a Straddle, you know, grabbing both an ITM call and put option with the same strike, won't the total premium be a bit too steep for our risk appetite which would also increase the breakeven thresholds due to higher total cost of straddle? What's the way around this?»
Understanding Tara's predicament, Maya replied, «Here's a trick.
We can transform those calls and puts into debit spreads by selling some OTM options. This move turns the Straddle into an Iron Fly, just like we discussed in our last chat.
But here's the catch – the potential profit is capped this way.»
«But hold on, if you're expecting a truly massive market move and you don't want your profit potential locked up, here's another thought: Strangles.»
Strangles:
Smiling, Maya carried on, «A Strangle is another option strategy, quite akin to a Straddle, but with a twist. You see, it involves different strike prices for the call and put options, situated out-of-the-money.»
Curious, Tara interjected, «Okay, so what's the real difference between straddles and strangles?»
Maya enthusiastically answered, «The deal with a Strangle is that it's generally cheaper than a Straddle.
This is because you're working with out-of-the-money options – those strike prices are farther from the current asset price. What this means is that
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