TheBull.Asia

Saturday 21

December, 2024 4:44 PM


The Quotes are Powered By Investing.com, the Forex, Futures, and Stock Markets Portal.
Industry Chart

TheBull PREMIUM

  • Trading
  • &
  • Technical
  • Analysis

What are straddles and strangles in options trading?

What are straddles and strangles in options trading?

By Expert Panel 18.06.2013


By Stephen Karpin, CommSec 

Question:

What are straddles and strangles?

Response:

The straddle and strangle are popular option strategies that involve a simultaneous buying or selling of an equal number of call and put options with the same expiration date. The only difference between the strategies is that the strangle has two different strike prices, while the straddle has the one common strike price.

The long straddle is the simultaneous purchase of an at-the-money call and an at-the-money put option.  Both options have the same underlying stock and expiry month.  A long straddle is a possible strategy to use when you think there is a large move coming in the underlying price but unsure about the direction.

A long strangle is similar to a straddle except the strike prices are further apart, i.e. out of the money strikes, which lowers the cost of executing the spread but also widens the gap needed for the underlying price to rise/fall beyond in order to be profitable. Like a long straddle, a long strangle is best traded when the implied volatility is low and or you expect a large movement of the underlying price in either direction.

An upcoming earning season is a good example. All else being equal, if the earnings report is encouraging; the underlying security is likely to rise along with the call option while the put option premium will erode. However if the earnings report is disappointing, the underlying security is likely to fall therefore the put option premium will rise and the call option premium will erode.

The risk with a long straddle and strangle is if the large movement in the underlying price and rise in volatility do not eventuate. In this situation, it is best to close the long straddle/strangle to recoup the option premium as it is negatively impacted by time decay and decreases in volatility. All premium are paid at time of opening the trade and you cannot lose more than what you pay upfront initially (maximum loss).

A short straddle/strangle is the opposite of a long straddle/strangle i.e we are selling the call and put option rather than buying the options.   Effectively, your trading view is the opposite of a long straddle/strangle, that is you do not anticipate a large move either up or down in the underlying price throughout the period and you expect a possible decrease in volatility.

Both short straddle and short strangle have limited profit potential but unlimited risk.  Substantial losses are possible with a big move in the underlying price over the periods or a major increase in volatility. There is also an initial and variation margin involved in these spreads to cover the risk.

 >> Click here to read other articles from this week's newsletter

 

Important Information

The views expressed in this article are those of Brian Phelps, a representative of Commonwealth Securities Limited (CommSec) ABN 60 067 254 399 AFSL 238814.  Commonwealth Securities Limited (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 and a Participant of the ASX Group and the Sydney Futures Exchange. As this information has been prepared without considering your objectives, financial situation or needs, you should, before acting on this information, consider its appropriateness to your circumstances and if necessary, seek appropriate professional advice.

CommSec Margin Loan is a facility provided by Commonwealth Bank of Australia and is administered by CommSec. Please be aware that a CommSec Margin Loan exposes you to unfavourable movements in the value of shares and units in managed funds, and possibly to margin calls. Please be aware that you are personally liable for any shortfall that occurs should your entire portfolio have to be sold to answer a margin call where there have been falls in the market value of your investments. Only investors who fully understand the risks associated with gearing into investments should apply. All applications for a Margin Loan are subject to the Commonwealth Bank’s credit approval process. Fees and charges apply.



FROM THE NEWSLETTER

The End Of The Third Industrial Revolution

The third industrial revolution started around... More

What are straddles and strangles in options trading?

The straddle and strangle are popular option... More



WHAT’S ON THIS WEEK

week 27 December 2024
    • 23
    • 24
    • 25
    • 26
    • 27

TheBull PREMIUM article search


AUSTRALIAN STOCK QUOTE

Don't know the company code? Click here



Featured Comment

The REIT sector is up close to 22% year over year, about twice the return of the ASX 200.

Bob Kohut, A Recovering Sector Is Good News For Income Investors

Broker buys

  • ASX Code
  • Company
  • Broker
  • TRSThe Reject ShopLonsec
  • ARPARB CorpLonsec
  • NABNABBell Potter
  • WHCWhitehaven CoalBell Potter
  • BHPBHP BillitonMorningstar
  • ORGOrigin EnergyMorningstar

Broker sells

  • ASX Code
  • Company
  • Broker
  • LYCLynasLonsec
  • AWCAluminaLonsec
  • WTFWotif.comBell Potter
  • TENTen NetworkBell Potter
  • CSLCSL LtdMorningstar
  • CRZCarsales.comMorningstar

Central Banks Rates

  • RBA3.00%
  • FED0.25%
  • BOE0.50%
  • BOC1.00%
  • RBNZ2.50%
  • ECB0.75%
  • SNB0.00%
  • BOJ0.10%

Recent Floats

  • ASX Code
  • Name & Issue Price
  • Day 1 Gain/Loss
  • CMTCott Oil and Gas Ltd, $0.20+2.5%
  • ENUEnterprise Uranium Ltd, $0.20-5%
  • PNLParinga Res Ltd, $0.20-10%
  • FOTFortunis Res Ltd, $0.20+20%
  • TGNTungsten Mining NL, $0.20+2.5%
  • MDDMandalong Res Ltd, $0.20+5%
  • WINWindward Res Ltd, $0.20+35%
  • DCNDacian Gold Ltd, $0.50+10%
  • MGBMagnolia Res Ltd, $0.20+5%
  • MTAMetals of Africa Ltd, $0.20+15%

Upcoming dividends

  • ASX Code
  • Company, Div., Franking
  • Ex-Div.
  • AFIAustralian Fndn Inv, 8c, 100%05/02/13
  • ANZPCAus & NZ Banking Grp, 227.2c, 100%08/02/13
  • JYCJoyce Corporation Ltd, 0.65c, 0%11/02/13
  • BENPBBendigo & Adelaide, 77.63c, 100%15/02/13
  • ANZPAAus & NZ Banking Grp, 104.6c, 100%21/02/13
  • ANZPBAus & NZ Banking Grp, 94.51c, 100%21/02/13
  • SBKPBSuncorp-Metway Ltd, 109.95c, 100%25/02/13
  • CBAPCCmlth Bank of Aus, 119.1c, 100%01/03/13
  • SUNPCSuncorp Grp Ltd, 133.77c, 100%04/03/13
  • BENPCBendigo & Adelaide, 83c, 100%18/03/13

Eight brokers like these stocks

  • ASX Code
  • Company Name
  • Consensus Target
  • STOSantos Limited$15.233
  • SWMSeven West Media Ltd$1.819
  • CWNCrown Limited$11.824
  • DOWDowner EDI Limited$4.525
  • RIORio Tinto Limited$78.258

Upcoming Floats

  • ASX Code
  • Company Name
  • Float Date
  • CPMCampus Edu Grp Ltd20/02/13
  • SXAStrata-X Energy Ltd20/02/13
  • CKECoke Resources Ltd28/02/13

PLEASE SUPPORT OUR SPONSORS, ASIA'S LEADING BROKERS:



© Copyright The Bull. All rights reserved.