Straddle and Strangle

 
What are Straddle and Strangle?

Straddle and strangle are two hedging strategies that expect the stock prices to move significantly away from their current prices.

We define a long straddle as a combination of a long call and a put with the same strike price and expiration. The strike price is usually near the current stock price). As the contract required to pay for two option premiums,  this strategy is only profitable when the stock price moves significantly in either direction. 

On the other hand, a strangle is similar to a straddle, except that the options purchased are slightly out-of-the-money  (e.g., call strike price > put strike price). Hence, it is cheaper to implement than the straddle. 

Example of Straddle and Strangle:

Let's take an example of an investor who purchased a call on the stock with X=45$ and pays a premium of 3$. He also bought a put option with the same maturity, X=45$ and a premium of $2. If the price at maturity moves significantly from the strike price, the investor will make a profit.

Topics: ACCA, CIMA, CPD, AAT, FRM