Lesson

Straddle & strangle volatility | Options Educator

Trade big moves with long volatility setups.

What you'll practice

  • Predict: after "Put strike $5 lower, call strike $5 higher", what happens to how far the stock must rise to break even at expiry?
  • Move the put's strike down and the call's strike up until the stock must rise about 8.0% to break even, within 0.5%.
  • Predict: after "6 days pass, the stock unmoved", what happens to the position's profit or loss today?

In this lesson

Straddles vs. Strangles

  • A straddle buys a call and a put at one strike; a strangle buys them at two out-of-the-money strikes
  • In the example the straddle costs $6.86 and the strangle $2.99 a share, and that cost is the most you can lose
  • Break-evens: the straddle at $93.14 and $106.86, the strangle at $92.01 and $107.99

What the Premium Is Pricing In

  • The premium is the market's price for the expected move, and a profit needs a bigger move than that
  • An at-the-money straddle costs roughly 0.8 × price × volatility × √time, here about $6.88 against a model price of $6.86
  • Decay accelerates: the straddle loses $0.72 in the first 6 days and $3.06 in the last 6

Managing the Volatility Bet

  • Long volatility prefers cheap implied volatility and a catalyst before expiration
  • Exit quickly after a catalyst, and size the position so that losing the whole debit is acceptable
  • Convert to a single-leg position if a trend is strong

Explore