← IntermediateLesson 18 · 4:22
Long straddle and strangle
Summary
You can build a long straddle and a long strangle, find both break-evens and read the expected move in their price. You can see that they are a bet on the size of a move, not its direction, and why the volatility crush after news can make them lose even when the stock jumps.
Key terms
- long straddle
- Buying a call and a put at the same strike and expiry, to profit from a big move either way.
- long strangle
- Buying an out-of-the-money put and an out-of-the-money call with the same expiry; cheaper than a straddle but needs a bigger move.
- expected move
- A rough guide to the size of move an option price assumes, read from the at-the-money call and put added together.
- out of the money
- An option that would get you nothing if used now, so all of its price is time value.
- volatility crush
- The sudden fall in implied volatility right after news such as earnings, because the big unknown is gone.
Check yourself
Answer each question to see why the right answer is right.
1. The night before news, with volatility at 45%, you buy the XYZ $100 call for $516 and the $100 put for $512. Where are your break-evens on the last day?
2. Instead, you buy the $95 put and the $105 call for $605. How does this strangle compare with the straddle?
3. XYZ falls to $85 by the last day. What is the straddle's result?
4. The news comes out, XYZ jumps $5 to $105, and volatility falls from 45% to 30%. Where is your straddle the next day?
5. What is a long straddle a bet on?
Finished the video and the quiz? .