The straddle, which is a delta neutral strategy, is best employed in high volatility markets. This strategy, like the strangle, is often referred to as a “smiley face” position because its risk graph takes on the shape of a smiley face due to its upward-sloping profits as shares drop towards zero or jump increasingly higher and away from current levels. The straddle makes money during extreme price moves in the underlying.
A long straddle is a spread where both a bullish long call and bearish long put on the same strike price and in the same contract month are purchased. When the trader purchases two limited risk but directionally opposed options, the trader anticipates that a sufficiently large price move in the stock, either up or down, will occur during the life of the position.
A strangle is a delta neutral strategy that involves the purchase of both a slightly out-of-the-money (OTM) call and an OTM put with the same expiration date and underlying security. This strategy is often placed with at least 90 days until expiration. Since the maximum risk is limited to the double premium for the long options, it’s important to find options exhibiting low volatility to keep your costs low.
A long strangle is very similar to the long straddle and, like the straddle, is known as either a smiley face position or volatility play. The design difference with the long strangle is that the trader is buying different strikes for his or her call and put contracts. In general, both the call and put are out-of-the money when the spread is initiated.
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