Trading Options in Turbulent Markets: Master Uncertainty through Active Volatility Management, 2nd Edition

Chapter 16

The Straddle and Strangle: The Risks and Rewards of Volatility-Sensitive Strategies

Traders and investors who trade straddles and strangles make these dicey choices because they believe that the volatility of the underlying asset does not correspond to the implied volatility embedded in the option price. When you buy or sell a strangle or straddle, you are on one level stating that the market is wrong, that the market is not correctly pricing the implied volatility of the options contracts involved. There is often substantial risk, however, in options strategies set up to exploit a perceived mispricing in the implied volatility of the underlying asset. The risk is that the asset could abruptly change after the straddle or strangle ...