InvestorQ : How is writing strangles different from writing straddles? What are the profit / loss on them?
Arti Chavan made post

How is writing strangles different from writing straddles? What are the profit / loss on them?

Answer
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2 years ago


A Strangle is a slightly improved version of a straddle. The risk in a straddle is that the margin for error is too low since both the call and put have the same strike. This increases risk in case markets show signs of volatility. An improvement to the straddle can be the Strangle. What a Strangle does is to use different strikes for calls and puts to expand your safety zone and reduce your risk. Of course, in the process you give up some returns but that is a risk worth taking. Let us go back to the above example. Now instead of selling a call and put of 900 strike, what you do in a strangle is to sell an RIL 880 put at Rs.16 and also sell a 920 call option at Rs.12. The total premium earned in this strangle is only Rs.28 as compared to Rs.35 in the straddle. But, your protection zone is now between Rs.852 and Rs.948. In the case of the straddle, you will have to hope for the stock to close around Rs.900 to earn full premium. In the case of strangle, you will earn the full premium if the stock closes in the range of Rs.880 to Rs.920. That is the reason, strangles are a lot more popular in the real world.