Long Straddle & Long Strangle Options Strategy Explained

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What Is Long Straddle?
A long straddle is an options strategy where the trader purchases both a long call and a long put on the same underlying asset with the same expiration date and strike price.

Understanding Long Straddle
The long straddle option strategy is a bet that the underlying asset will move significantly in price, either higher or lower. The profit profile is the same no matter which way the asset moves. Typically, the trader thinks the underlying asset will move from a low volatility state to a high volatility state based on the imminent release of new information.

The strike price is at-the-money or as close to it as possible. Since calls benefit from an upward move, and puts benefit from a downward move in the underlying security, both of these components cancel out small moves in either direction. Therefore, the goal of a long straddle is to profit from a very strong move, usually triggered by a newsworthy event, in either direction by the underlying asset.

Traders may use a long straddle ahead of a news report, such as an earnings release, Fed action, the passage of a law, or the result of an election. They assume that the market is waiting for such an event, so trading is uncertain and in small ranges. When the event occurs, all that pent-up bullishness or bearishness is unleashed, sending the underlying asset moving quickly. Of course, since the actual event's result is unknown, the trader does not know whether to be bullish or bearish. Therefore, a long straddle is a logical strategy to profit from either outcome. But like any investment strategy, a long straddle also has its challenges.

The risk inherent in the long straddle strategy is that the market may not react strongly enough to the event or the news it generates. This is compounded by the fact that option sellers know the event is imminent which increase the prices of put and call options in anticipation of the event. This means that the cost of attempting the strategy is much higher than simply betting on one direction alone, and also more expensive than betting on both directions if no newsworthy event were approaching.

Because option sellers recognize that there is increased risk built into a scheduled, news-making event, they raise prices sufficient to cover what they expect to be approximately 70% of the anticipated event. This makes it much more difficult for traders to profit from the move because the price of the straddle will already include mild moves in either direction. If the anticipated event does not generate a strong move in either direction for the underlying security, then options purchased likely will expire worthless, creating a loss for the trader.

What Is a Strangle?
A strangle is an options strategy in which the investor holds a position in both a call and a put option with different strike prices, but with the same expiration date and underlying asset. A strangle is a good strategy if you think the underlying security will experience a large price movement in the near future but are unsure of the direction. However, it is profitable mainly if the asset does swing sharply in price.

A strangle is similar to a straddle but uses options at different strike prices, while a straddle uses a call and put at the same strike price.

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#LongStraddle #LongStrangle #TradingOptions
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DISCLAIMER:
This video is for entertainment purposes only. I am not a legal or financial expert or have any authority to give legal or financial advice. While all the information in this video is believed to be accurate at the time of its recording, realize this channel and its author makes no express warranty as to the completeness or accuracy, nor can it accept responsibility for errors appearing in this video.