What are straddles and strangles?
They may sound like wrestling moves, but straddles and strangles are actually two types of options trading strategies. They let traders bet on how much or how little a stock might move, rather than on whether it will move up or down.
To understand straddles and strangles, you need to understand options trading. Here’s a quick rundown:
Options are contracts. When you buy an option, you’re buying the right (but not the obligation) to buy or sell a specific stock at a set price by a specific date. When you sell an option, you’re taking on the obligation to buy or sell that stock at that price if the buyer decides to exercise their option.
There are two main types of options: call options and put options.
Call options give a buyer the right to buy a stock at a set price (called the strike price) on or before the expiry date. Sellers of call options, on the other hand, take on the obligation to sell the stock at that price if the buyer decides to exercise their option.
Put options give a buyer the right to sell a stock at the strike price on or before the expiry date. Sellers of put options take on the obligation to buy the stock at that price if the buyer decides to exercise their option.
What is a straddle?
A straddle is a trade that involves taking two opposite positions and buying or selling an equal number of call options and put options at the same strike price and expiry date. One straddle is called a long straddle, and the other is called a short straddle.
Long straddle
A long straddle is when you buy an equal number of call options and put options at the same strike price and expiry date, typically with the goal of selling whichever one gains value and letting the other expire. The strike price is typically the current stock price, or as close as possible.
Why do this? Because you’re betting the price of the stock is about to move in a pretty significant way — you just don’t know if it will go up or down. If the stock price goes up, the call option gains value. If the stock price goes down, the put option gains value.
Because the strike price is the same as the current stock price (called being “at the money”), it doesn’t take as big of a move for one side to become profitable. That’s why straddles are more expensive to set up than a strangle. If the stock price dramatically moves up or down, the upside can be unlimited. But if it barely moves, you risk losing a relatively small amount: the upfront cost you paid (called the “premium”).
Short straddle
A short straddle is when you sell an equal number of call options and put options at the same strike price and expiry date, typically with the goal of keeping the premiums you collect upfront. The strike price is usually set at or near the current stock price.
Why would you sell both? Because you’re betting the price of the stock will stay close to the strike price, meaning neither option becomes valuable enough for the buyer to exercise. If the stock stays about the same, both options expire worthless, and you keep the premiums as profit.
Because both options are sold at the same strike price, your potential profit is limited to the total premiums you received. But if the stock moves sharply in either direction, your losses can grow quickly, and in theory, there’s no limit to how much you could lose on the call side if the stock price soars.
What is a strangle?
A strangle is a trade that involves taking two opposite positions and buying or selling an equal number of call options and put options with the same expiry date, but at a different strike price. One is called a long strangle, and the other is called a short strangle.
Long strangle
A long strangle is when you buy an equal number of both call options and put options with the same expiry date but at different strike prices, usually one a bit above and one a bit below the current stock price (called being “out-of-the-money”).
Like with straddles, you’re betting the price of the stock is about to move in a pretty significant way, with the goal being to sell whichever one gains value and let the other expire. The main advantage of a strangle is that it costs you less upfront because you’re buying an option out-of-the-money which has no intrinsic value. The tradeoff is that the stock has to move further before either option becomes profitable, since the call and put are set at strike prices above and below the current price.
Short strangle
A short strangle is when you sell both a call option and a put option with the same expiry date but at different strike prices, usually one a bit above and one a bit below the current stock price (so both are “out-of-the-money”). The goal is to collect the premiums from selling the options, hoping the stock price stays between the two strike prices until expiry.
Why would you sell both? Because you’re betting the stock will stay relatively stable, not moving far enough in either direction to make either option worth exercising. If the stock stays within that range, both options expire worthless, and you keep the premiums as profit.
Because the strike prices are set above and below the current stock price, your potential profit is limited to the premiums you received. But if the stock moves sharply beyond either strike price, losses can grow quickly, and they can be significant — especially on the call side if the stock rises substantially.
Straddles vs. strangles
Straddle | Strangle | |
|---|---|---|
| Strike price | The call and the put have the same strike price (usually the current stock price). | The call and the put have different strike prices (one above and one below the current stock price). |
| Expiry | Same date for both options | Same date for both options |
| Upfront premium | Higher premium | Lower premium |
| Profit potential | Long: high if the stock price moves significantly. Easier to profit from small moves. Short: low if the stock price moves significantly. Harder to profit from small moves. | Long: high if the stock price moves significantly. Less likely to profit from small moves. Short: low if the stock price moves significantly. More likely to profit from small moves. |
| Risk | Long: if the stock price doesn’t move enough, you lose the premium you paid and both options expire worthless. Short: if the stock price moves too much, you are obligated to buy or sell the underlying stock at the strike price, regardless of its current value. | Long: if the stock price doesn’t move enough, you lose the premium you paid and both options expire worthless. Short: if the stock price moves too much, you are obligated to buy or sell the underlying stock at the strike price, regardless of its current value. |
How to set up straddles and strangles
The basic process for buying a call option or put option is choosing the stock and then selecting the parameters of the option, including:
Strike price
Expiry date
Number of contracts (the quantity of put options available to buy or sell; each contract represents a standardized number of shares of the stock)
How to set up a long straddle
Pick the stock you think is about to experience significant price movement.
Choose an expiry date.
Buy an equal number of call and put options at the same strike price (remember, it’s almost always the same as the current stock price).
If the stock goes up on expiry
The call option increases in value, because it lets you buy the stock at the lower strike price.
The put option loses value, because selling at the strike price would be worse than selling at the higher market price.
Result: if the stock rises enough, the profit on the call option outweighs the combined cost of buying both options (the total premium), and you come out ahead.
If the stock goes down on expiry
The put option increases in value, because it lets you sell the stock at the strike price, which is now higher than the market.
The call option loses value, because it only lets you buy the stock at the strike price, which is now above the market (and no one would pay more than they have to).
Result: if the stock price falls enough, the put option’s gain exceeds what you paid for both options, and you profit.
If the stock stays about the same on expiry
Neither option gains much value, because the strike price and the market price are basically the same.
Both options expire worthless.
Result: you lose the premium you paid for both options.
How to set up a short straddle
You can also create a short straddle by selling both a call option and a put option with the same strike price (usually set near the current stock price) and expiry date.
This strategy takes the opposite view of a long straddle. Instead of paying a premium, you collect it upfront, betting the stock will stay close to the strike price until expiry.
If the stock price doesn’t move much, both options expire worthless and you keep the premium as profit.
But if the stock moves sharply in either direction, losses can grow quickly — especially on the call side if the stock price rises significantly. Your potential profit is limited to the premiums you received, while your potential loss is theoretically unlimited.
How to set up a long strangle
Pick the stock you think is about to experience significant price movement.
Choose an expiry date.
Buy call options at a strike price above the current stock price.
Buy the same number of put options at a strike price below the current stock price.
If the stock goes up on expiry
The call option increases in value, because it lets you buy the stock at a strike price that is below the market price.
The put option loses value, because it only lets you sell at a lower price than the market.
Result: if the stock price rises far enough above the call option’s strike price, the call option’s gain exceeds what you paid for both options, and you profit.
If the stock goes down on expiry The put option increases in value, because it lets you sell the stock at a strike price that is above the market price.
The call option loses value, because it only lets you buy the stock at a strike price that is above the market (and why would you pay more than you have to).
Result: if the stock price falls far enough below the put option’s strike price, the put option’s gain exceeds what you paid for both options, and you profit.
If the stock stays between the strike prices of the call and the put on expiry
Neither option gains much value, because the stock price never reaches the call’s higher strike price or the put’s lower strike price.
Both options expire worthless.
Result: you lose the upfront cost you paid for both options.
How to set up a short strangle
A short strangle works the same way as a long strangle, but in reverse. You sell both a call and a put with the same expiry date but at different strike prices — one above and one below the current stock price — and collect the premiums upfront.
You’re betting the stock will stay between those two strike prices.
If it does, both options expire worthless and you keep the premiums as profit.
If the stock moves beyond either strike price, you start taking losses. Those losses can be substantial if the move is significant, especially if the stock price climbs far above the call strike.
When to use straddles or strangles
Traders use straddles or strangles when they want to trade on volatility — how much a stock might move, rather than which direction it will go.
These strategies can work in two ways. Traders who expect significant price movement might buy a straddle or strangle to profit from a sharp swing. Those who expect the stock to stay relatively stable might sell a straddle or strangle to earn a profit if prices don’t move much.
The reason for anticipating significant price movement is an expected major event that typically has implications for a specific stock or the wider market. That could be something happening within a company, such as a major product launch, an earnings announcement, or a takeover. Or it could be a government policy decision or international relations shift that affects a certain industry.
It’s that volatility that makes straddles and strangles appealing, which is why they’re not recommended strategies for beginner or novice traders. They’re best for experienced traders who can spot periods of high uncertainty, know how to set up options, can manage the upfront costs, and can weather the risk of losing their investment
When to use a straddle
A long straddle is the better choice when you expect a big move, but you aren’t willing to bet on just how dramatic it’s going to be. You want a strategy that can profit from even a moderate swing in either direction. The downside is that the straddle often requires the most cost upfront to enter the trade.
A short straddle is the better choice when you expect the stock price to stay near its current level and don’t anticipate much movement either way. You want a strategy that can profit from stability rather than volatility. The upside is that you collect premiums upfront, but the risk is much higher, since your losses can grow quickly if the stock moves sharply in either direction.
When to use a strangle
A long strangle is the better choice when you expect a big move and, as a tradeoff for spending less upfront, you’re willing to accept that the move has to be pretty dramatic for you to profit. It gives you a lower-cost way to bet on the stock swinging in either direction.
A short strangle is the better choice when you expect the stock to stay within a certain range and don’t anticipate a major move in either direction. As a tradeoff for taking on more risk, you collect premiums upfront and profit if the stock price stays between the two strike prices until expiry.
How to manage the risks of straddles and strangles
Straddles and strangles come with risk, whether you’re buying them or selling them. For long positions, your risk is limited to the premiums you paid for both options, but it’s common to lose that entire amount if the stock doesn’t move enough.
For short positions, the risk works in reverse: you collect premiums upfront, but if the stock moves sharply beyond your strike prices, your potential losses can grow quickly (and on the call side, they’re theoretically unlimited).
The good news is there are a few simple ways to manage that risk: Position sizing. Only put a small portion of your trading money into straddles or strangles. For long straddles and strangles, that helps protect you if both options expire worthless.
Monitoring volatility. Straddles and strangles are bets on stock movement, so keeping an eye on what might spark big swings and how volatility changes is essential. Long straddles and strangles benefit when volatility rises and prices swing; short straddles and strangles benefit when volatility falls and prices stay stable. Keeping an eye on upcoming events and shifts in volatility helps you decide whether to adjust your strategy.
Exit strategies. Like most advanced trading strategies, it’s smart to have a plan for when to get out. For straddles and strangles, that can mean taking your profit once one option has gained enough, or cutting your losses if the stock isn’t moving how you expected. You don’t have to hold your options until the expiry; closing early can help you lock in your gains or reduce your losses.
