InvestorQ : Is a buying Strangle strategy same as buying Straddle and when it is used?
Priyanka Jain made post

Is a buying Strangle strategy same as buying Straddle and when it is used?

Answer
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Swati Naik answered.
2 years ago


When you are bullish on the market you can buy a call and when you are bearish on the market you can buy a put option. But what do you do when you are not sure of the direction of the market? If you are expecting Infosys to display volatile price movements but you are not sure if the price will move up or whether it will move down. If you are extreme volatility in the stock then you can buy a call and a put. If you buy a call and put on the same strike it is a straddle while if you buy call on a higher strike and put on a lower strike then it becomes a strangle. The cost of the strangle is lower than a straddle since the call and the put are out of the money. This makes your base flatter instead of sharp like a straddle. Here is how the payoffs will look like.

Buy Strangle by buying RIL 1140 call at Rs.22 and buying RIL 1060 put at Rs.18

Long Call Strike

RIL CMP

Diff

ITM/OTM

Call Premium

P&L on Call

Call Profit

long Put Strike

RIL CMP

Diff

ITM/OTM

Put Premium

P&L on Put

Put Profit

Total Profit

1140

900

-240

OTM

-22

0

-22

1060

900

160

ITM

-18

160

142

120

1140

920

-220

OTM

-22

0

-22

1060

920

140

ITM

-18

140

122

100

1140

940

-200

OTM

-22

0

-22

1060

940

120

ITM

-18

120

102

80

1140

960

-180

OTM

-22

0

-22

1060

960

100

ITM

-18

100

82

60

1140

980

-160

OTM

-22

0

-22

1060

980

80

ITM

-18

80

62

40

1140

1000

-140

OTM

-22

0

-22

1060

1000

60

ITM

-18

60

42

20

1140

1020

-120

OTM

-22

0

-22

1060

1020

40

ITM

-18

40

22

0

1140

1040

-100

OTM

-22

0

-22

1060

1040

20

ITM

-18

20

2

-20

1140

1060

-80

OTM

-22

0

-22

1060

1060

0

ATM

-18

0

-18

-40

1140

1080

-60

OTM

-22

0

-22

1060

1080

-20

OTM

-18

0

-18

-40

1140

1100

-40

OTM

-22

0

-22

1060

1100

-40

OTM

-18

0

-18

-40

1140

1120

-20

OTM

-22

0

-22

1060

1120

-60

OTM

-18

0

-18

-40

1140

1140

0

ATM

-22

0

-22

1060

1140

-80

OTM

-18

0

-18

-40

1140

1160

20

ITM

-22

20

-2

1060

1160

-100

OTM

-18

0

-18

-20

1140

1180

40

ITM

-22

40

18

1060

1180

-120

OTM

-18

0

-18

0

1140

1200

60

ITM

-22

60

38

1060

1200

-140

OTM

-18

0

-18

20

1140

1220

80

ITM

-22

80

58

1060

1220

-160

OTM

-18

0

-18

40

1140

1240

100

ITM

-22

100

78

1060

1240

-180

OTM

-18

0

-18

60

1140

1260

120

ITM

-22

120

98

1060

1260

-200

OTM

-18

0

-18

80

1140

1280

140

ITM

-22

140

118

1060

1280

-220

OTM

-18

0

-18

100

1140

1300

160

ITM

-22

160

138

1060

1300

-240

OTM

-18

0

-18

120

This strangle is a typically volatile strategy like a straddle but it entails a lower cost since its strikes are spread wide apart. This strategy only works when the markets are volatile either ways because you need to cover the premium cost of the put and the call. The maximum loss as can be seen in the above chart will be Rs.40 and it will occur at the strike range (1060 to 1140) in which the Strangle is created. The breakeven point on the downside will be 1020 (1060 – 40) while on the upside the breakeven level will be 1180 (1140 + 40). As long as the RIL price stays within this range, you will lose money on the long strangle. The moment the price goes outside this range, you start gaining on the Strangle.