Thread by @falcon_fintwit

What is the difference between a straddle and a strangle? Aren't they the same thing?

Yes, but no, but also maybe.

Read below to find out, with visuals from the @unusual_whales Options Profit Calculator

A thread (1/?)

Both straddles and strangles allow for an investor to profit off of significant movements in the price of the underlying, and the profit % is based on the magnitude of the move. (2/?)

A long Straddle involves buying a long call and long put on the same strike, on the same expiration. These cost more since you're buying either both legs ATM or one leg slightly ITM. (3/?)

Since a straddle is delta neutral, it is also risk neutral. This strategy is typically used when a company has an expected announcement, be that ER, product announcement, or leadership change. (4/?)

Great, but what about strangles?

Long strangles are functionally the same thing, but allow you to play directionally. Say you are bullish on $FB ER because you read some DD some random shilled online and you have conviction (let's be honest, we all do this to an extent) (5/?)

Because you're biased towards a certain move, you can pick the direction. In this situation, buying a call at or barely OTM, and hedging it with a long put that is cheaper and several strikes away reduces your break even price significantly, since the put is less expensive (6/?)

You are better rewarded for smaller bullish movement since the delta of the put is much smaller than the delta of the call, but you're hedged for extreme downside risk with the long put that's several strikes away from spot price. (7/?)

Let's check these out in the @unusual_whales Options Profit Calculator

At time of writing, $FB is trading at $340.76.
Looking at the straddle (340_C/340_P) for 11/19, we can see the breakevens at expiry are lower at ($355.68, $324.32), since both contracts are bought ATM.

Comparing this to a strangle (340_C/335_P) for 11/19, the strangles call-side breakeven is lower, since the initial debit to enter is lower. The new breakevens are at ($353.68/$321.32). (9/?)

If you're trying to decide on what strategy to play for a directionally biased move (bullish on ER), you'd play a strangle since:
1) Strangle capital requirement is less ($1400 debit vs $1600 debit)
2) You have a much higher probability of breaking even with a strangle
(10/?)

If you don't have any biased directional sentiment, a straddle would be better suited. Or, you can also adjust the strikes of the strangle to be evenly weighted, which reduces your breakeven, but lowers your probability of profit. (11/?)

But Falcon, what about the short side?

No, scary.

A short straddle/strangle would be used to capitalize on high Implied Volatility, but at expiry, it needs to stay between the strikes. (12/?)

Since IV is mean reverting, if it's higher than normal and an investor is speculating for it to drop, selling a strangle/straddle should capitalize on option price adjustment. (13/?)

IV will typically fall following an earnings report (IV crush), so you capitalize on the high volatility in hopes that it greatly falls, and even though one side of the position is ITM, it could still be profitable since the contract is worth far less than before the ER (14/?)

If you inversed the straddle from above, and SOLD TO OPEN the 340_C and the 340_P, your break even would stay the same at ($356.50, $323.50), but the underlying would need to stay at the same price at the expiration. The same applies to a strangle. (15/?)

Unless you are comfortable with risk and understand how volatility works following catalysts, I'd avoid selling (short) strangles/straddles.

If you're not comfortable, don't worry, we're working on some cool guides to get everyone on the same boat, so stay tuned. (16/?)

Also to note, you can also play the strangle bearishly, or neutrally (much like the straddle!). As always, none of this is advice, and the $FB reference is merely just for the sake of this thread. (17/?)

Hope you learned something today!

If you have any questions or debate points, please @ me and we can chat about it! (18/18)