Should I Buy Straddles or Strangles? // Options straddle strategy Options strangle strategy Options 101
welcome to looking at the markets with David Moadel
today we're going to talk about a couple of options strategies that people ask me
about sometimes the question today is should i buy straddle or strangles so
let's talk about that
expecting a big move
if you're expecting a big move in a stock or ETF commodity currency etc but
you don't know whether the big move will be up or down
then you might be considering buying a straddle or a strangle just to review a
straddle is where you buy a call and a put with the same expiration dates and
for the same underlying equity and with the same strike price usually at the
money
a strangle is the same as a straddle accept the call and the put have
different strike prices and usually out of the money so why do this
the big advantage of buying straddle and strangles is the fact that you don't
need to predict whether the stock will move up or down as long as it makes a
big move within a fairly short period of time you can profit but there are some
serious
disadvantages not needing to predict whether a stock will move up or down
probably sounds great right however there are some disadvantages straddle
tend to be expensive
remember you're not just buying one option
you're buying both a call and a put so if the stock doesn't make a big move in
a fairly short period of time you can lose more money since you paid for two
options strangles tend to be less expensive than straddle since the
options are generally speaking out of the money but that also means that
you'll need an even bigger move from the stock within a fairly short period of
time
thus your chances of succeeding are even smaller than they are with a straddle
and they often don't work as planned
people tend to buy straddle and strangles when implied volatility or IV
is low and or when the Bollinger Bands squeeze or contract
the hope is that the low volatility squeeze will soon be followed by a
higher volatility or a big move
however the move often doesn't happen soon enough
or it might not be big enough or both actually
so for example we're looking at a chart of xle which is an ETF that represents
the energy sector
now here's an example of low implied volatility and so you've got a Bollinger
Band squeeze or contraction here followed by a big move
ok so if you had purchased a straddle or a strangle right here
yeah you might you might have done pretty well
however doesn't always work out as planned
a lot of times the bollinger bands will squeeze and not be followed by a big
move
so as you can see if you had purchased here you might not have done so well
because xle continued to stay within a tight range moved up a little down a
little up a little down a little so the Bollinger Bands squeezed here but they
stayed squeezed for a long time
in other words there was no big move for a long time and time is not on your side
day after day you've got time decay deteriorating both your put and your
call
it's almost like you've got double the time decay losses when days go by and
there is no big move
so you really need a sizable move soon after you buy the straddle or strangle
and again if you bought it here and maybe here you were hoping for a big
directional move
nope doesn't happen and you're hoping for it here no you're hoping it will go
way down here
No and so every day it's like an ice cube melting both your put and your call
and so every day tik tok tik top x going and going and you're straddle or
strangle is losing value because the underlying equity or asset is just not
moving one way or the other big enough or soon enough
expensive prior two big events
yes there is a big event coming up soon
such as an earnings report or a fed announcement option prices
both puts and calls are inflated because people are expecting a big move to
possibly happen soon
so straddle and strangles become even more expensive than usual
prior to these events making it even more difficult to achieve a profit
so what's the takeaway
well personally i don't typically by straddle or strangles you might want to
consider more economical alternatives with better odds of making a profit
so if you'd like help with options or stocks strategies or with finance in
general i can certainly assist you with that if you need help
feel free to contact me David Modell my email address is David Modell @
gmail.com and by the way I'd like to dedicate this video to my girlfriend
Wendy hi Wendy how you doing
and also if you like this video I hope you'll feel free to give it a thumbs up
or leave comments
the comments let me know how i'm doing and if there are topics you'd like to
know about you can also leave that in the comments or again you can email me
anytime
thanks a lot and i hope to hear from you soon