Straddle and Strangle
Unlike a spread strategy, which consists of all calls or all puts, a straddle or a strangle each consists of a long call and long put or a short call and a short put. If the call and put are purchased, the trader is long the straddle or strangle; if both options are sold, the trader is short the straddle or strangle. The idea is to establish a position on both sides of the market, where you can take advantage of volatility expansion and trading outside a range (long straddle and strangle) or volatility contraction, time decay, and trading within a range (short straddle and strangle).
This chapter covers both a straddle and a strangle in which the number of options sold equals the number purchased and for which options expire in the same month. Other chapters explore option strategies in which the number of options sold differs from the number bought and in which the sides, or legs, of the spread expire at different times. A straddle and a strangle are both addressed in this chapter because they have similar characteristics. The first part of this chapter addresses a straddle, and the second part addresses a strangle.
A straddle consists of a call and a put with the same terms (strike price, expiration date, and underlying stock). A long straddle consists of a long call and a long put with the same strike price and expiration date and is used to profit from volatility; for example, buy one February 100 call and buy one February 100 ...