The post Strangle vs. Straddle: Which Is the Better Level 3 Options Strategy by Marc Guberti appeared first on Benzinga. Visit Benzinga to get more great content like this.
Do you believe a stock is set to move sharply in the next few days, weeks or months? You don’t have to guess the direction if you initiate a strangle or a straddle. These options trading strategies reward traders for dramatic price movements. While you have to correctly guess the direction if you buy one call or one put, strangles and straddles require that you purchase one of each contract. If a trader can only choose between a straddle or strangle, which one should they choose? This in-depth analysis of strangle versus straddle options can help you make a better decision.
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What Is a Straddle?
A strangle is an options trading strategy that relies on a sharp price movement to achieve profitability. The trader starts this position by purchasing one call and one put with the same strike price and expiration date. A strangle loses its value if a stock’s price stays the same.
What Is a Strangle?
A straddle is similar to a strangle. This options trading strategy involves a call and a put, each with different strike prices. The trader profits if the stock swings sharply in either direction, but the straddle will lose value if the stock stays flat or barely moves.
What Is Level 3 Options Trading?
Not everyone can trade strangles and straddles. You need a Level 3 options trading account with your brokerage to use these strategies. Options brokers have tiers in place to determine which options trading strategies you can use. Level 1 options traders can only sell covered calls, while Level 5 options traders can use any strategy.
Level 3 options trading acts as the middle ground and lets you access most of the strategies. Strangles and straddles are part of this account, but you can also access condors, butterflies, vertical spreads and other strategies.
5 Differences Between Strangle and Straddle
Strangles and straddles are similar, but they have a few key differences.
Strike Prices
The strike prices for a straddle’s calls and puts are the same. If the trader buys a call with a $70 strike price, the put will also have a $70 strike price. The options in a strangle have different strike prices, and the call always has a higher strike price. For a strangle, a trader may buy a call with a $75 strike price and a put with a $65 strike price.
Cost to Implement
A straddle costs more money to set up than a strangle. Straddles use strike prices near the money or at the money. Options traders who use strangles buy a call and put that are both further out of the money. Because these two options are further out of the money, their premiums are lower. That’s why it costs less money to set up a strangle than a straddle.
Regardless of which one you pick, it’s important to keep commissions in mind. Many brokers charge a fee for each option trade. You may have to pay a fee to purchase a call and then another fee to close the position. This can get frustrating and meaningfully bite into your profits, especially if you want to open up multiple straddles and strangles. Traders should look for options brokers that have lower fees to reduce their expenses.
Directional Bias
Straddles and strangles both benefit from sharp price movements in either direction. The directional bias depends on how you set your strike prices, but significant movements will help both positions. Straddles have some variance based on how far out of the money you go with each position.
Assume a stock is priced at $100 per share. An options trader can initiate a strangle by purchasing a call with a $105 strike price and a put with a $90 strike price. It’s better for the trader for the stock to go up $7 than decrease by $7. The call is in the money is the stock price reaches $107, while $93 per share results in the put expiring worthless..
Amount of Change
An option experiences more dramatic price swings if it is out of the money. While straddles typically involve options near or at the money, strangles traders buy a call and put further out of the money. A straddle can go through a quicker change in value.
Potential Profit
A strangle has greater profit potential than a straddle. It achieves breakeven sooner than a strangle because those options are at the money. Straddles have a lower cost, which is useful in case the options expire worthless. However, a strangle has greater profit potential.
Tips on How to Choose Between Strangle and Straddle
Are you wondering whether a strangle or straddle is the best move for your portfolio? Here are some things to consider before buying a call and put in one of these strategies.
- Which strategy works for your risk tolerance? Straddles cost more but have a more generous breakeven price. Both options present the risk of paying for something that expires worthless, but straddles tend to have breakeven prices that are closer to the money than strangles.
- What are your portfolio goals? Knowing how options trading fits into your portfolio goals can help you decide whether a strangle or straddle is the better choice for you.
- How much capital do you want to allocate? Traders with less capital can benefit from strangles, but if you have no problem with spending a little extra, straddles may be the way to go.
- Do you need a hedge? If you have an out-of-the-money covered call, buying a near-the-money call for a straddle may be part of a hedge. A strangle or straddle can become part of a hedge, and it’s a good idea to see which hedges you need before choosing a strategy.
- Do you value profits or saving money? A strangle is less expensive to set up, but profits are higher with straddles. Knowing whether you value profits or saving money more can guide your decision.
Strangle or Straddle?
Strangles and straddles are Level 3 options trading strategies that can increase your returns and help you capitalize on sharp price movements. Knowing your portfolio objectives can help you decide which options trading strategy is right for you. Straddles and strangles are the tip of the iceberg with a Level 3 options trading account. You can also try condors, butterflies, vertical spreads and other options trading strategies that aren’t available at Levels 1 and 2.
Frequently Asked Questions
Which is better: straddle or strangle options?
A straddle is easier to start because the premiums are lower, but strangles have greater profit potential.
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Which is safer: straddle or strangle?
Straddles are safer because they have lower premiums than strangles. Both of these trading strategies rely on sharp price movements to provide a return for traders.
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Which is more profitable: strangle or straddle?
When the trade goes right, a strangle is usually more profitable than a straddle.
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The post Strangle vs. Straddle: Which Is the Better Level 3 Options Strategy by Marc Guberti appeared first on Benzinga. Visit Benzinga to get more great content like this.