Option Strategies: Long Straddle and Long Strangle
Added on 2023-04-23
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(a)
On July 2, 2007, the values of the stock indices were SPX=1519.43 and OEX=699.49 .
The two option strategies are Long Straddle and Long Strangle.
Straddle:
A long straddle is just a combination of long Call and long Put , with the same strike price and on the
same underlying stock. An investor sensing high volatility, may use straddle to gain from either side
but will lose money if the stock does not have high volatility.
Let us go long on a Call option of OEX having exercise price of 705 and a Put option of OEX having
exercise price of 705.
Here Call Option Price is = 10
Here Put Option Price is = (14.5+15.6)/2 = 15.05
So, net investment is 25.05.
Let us go long on a Call option of SPX having exercise price of 1525 and a Put option of SPX having
exercise price of 1525.
Here Call Option Price is = 30
Here Put Option Price is = 30
So, net investment is 60.
Strangle:
A long strangle is just a combination of long Call and long Put, such that both the Call option and the
Put option are out of the money. This makes the investment a bit lower. An investor sensing high
volatility, may use strangle to gain from either side but will lose money if the stock does not have
high volatility.
Let us go long on a Call option of OEX having exercise price of 705 and a Put option of OEX having
exercise price of 695.
Here Call Option Price is = 10
Here Put Option Price is = 11.9
So, net investment is 21.9
Let us go long on a Call option of SPX having exercise price of 1525 and a Put option of SPX having
exercise price of 1515.
Here Call Option Price is = 30
Here Put Option Price is = 27
So, net investment is 57
On July 2, 2007, the values of the stock indices were SPX=1519.43 and OEX=699.49 .
The two option strategies are Long Straddle and Long Strangle.
Straddle:
A long straddle is just a combination of long Call and long Put , with the same strike price and on the
same underlying stock. An investor sensing high volatility, may use straddle to gain from either side
but will lose money if the stock does not have high volatility.
Let us go long on a Call option of OEX having exercise price of 705 and a Put option of OEX having
exercise price of 705.
Here Call Option Price is = 10
Here Put Option Price is = (14.5+15.6)/2 = 15.05
So, net investment is 25.05.
Let us go long on a Call option of SPX having exercise price of 1525 and a Put option of SPX having
exercise price of 1525.
Here Call Option Price is = 30
Here Put Option Price is = 30
So, net investment is 60.
Strangle:
A long strangle is just a combination of long Call and long Put, such that both the Call option and the
Put option are out of the money. This makes the investment a bit lower. An investor sensing high
volatility, may use strangle to gain from either side but will lose money if the stock does not have
high volatility.
Let us go long on a Call option of OEX having exercise price of 705 and a Put option of OEX having
exercise price of 695.
Here Call Option Price is = 10
Here Put Option Price is = 11.9
So, net investment is 21.9
Let us go long on a Call option of SPX having exercise price of 1525 and a Put option of SPX having
exercise price of 1515.
Here Call Option Price is = 30
Here Put Option Price is = 27
So, net investment is 57
Advantages of Long Straddle:
1. The break-even points of a straddle are closer together than strangles.
2. There is a very less chance that the straddles will be 100% loss making if held till expiration.
3. The straddles are less sensitive to time decay than strangles.
Disadvantages of Long Straddle:
1. Straddles are more expensive than strangles.
2. We can buy only a few straddles with a given amount of money.
Advantages of Long Strangle:
1. Strangle has lower cost and maximum risk compared to straddles.
2. We can buy more straddles with a given amount of money.
Disadvantages of Long Strangle:
1. Strangle has break-even points further away than do straddles have.
2. There is a good chance that we can lose 100 % in strangle.
3. Strangles are more sensitive to time decay than straddles.
1. The break-even points of a straddle are closer together than strangles.
2. There is a very less chance that the straddles will be 100% loss making if held till expiration.
3. The straddles are less sensitive to time decay than strangles.
Disadvantages of Long Straddle:
1. Straddles are more expensive than strangles.
2. We can buy only a few straddles with a given amount of money.
Advantages of Long Strangle:
1. Strangle has lower cost and maximum risk compared to straddles.
2. We can buy more straddles with a given amount of money.
Disadvantages of Long Strangle:
1. Strangle has break-even points further away than do straddles have.
2. There is a good chance that we can lose 100 % in strangle.
3. Strangles are more sensitive to time decay than straddles.
(b)
Straddle:
For OEX , the maximum profit is unlimited.
Maximum loss is 26.85
The two breakeven points are : 678.15 and 731.85
Straddle:
For OEX , the maximum profit is unlimited.
Maximum loss is 26.85
The two breakeven points are : 678.15 and 731.85
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