You're watching a stock before a huge earnings report, and you're convinced a massive move is coming. The catch? You have absolutely no idea which way it's going to go. What if you didn't have to guess the direction?
What are straddle and strangle strategies in options trading?
In this deep dive, we explore two powerful, non-directional strategies designed for that exact scenario. These are "long volatility" plays where you profit from the magnitude of the move, not the direction. We break down the mechanics of the long straddle (buying a call and put at the same strike) and the long strangle (buying a call and put at different out-of-the-money strikes).
You'll learn the critical trade-off between the two: a straddle is more expensive but has closer break-even points, while a strangle is cheaper but needs a much bigger move to be profitable. Most importantly, we cover the #1 risk: the IV Crush, and why you can be right about a move and still lose money if it wasn't big enough to overcome the collapse in implied volatility.
After listening, which strategy will you consider for the next big earnings event?
Key Takeaways
- Non-Directional (Long Volatility): Straddles and strangles are strategies for when you are confident a large price move will happen but are neutral or unsure of the direction. You are betting on the "knockout," not the winner.
- Long Straddle (Same Strike): This involves buying a call and a put with the same strike price (at-the-money) and the same expiration. This is the more expensive option, but its break-even points are closer to the current stock price.
- Long Strangle (Different Strikes): This involves buying a call and a put with different strike prices (both out-of-the-money) and the same expiration. This is a cheaper way to enter, but it requires a much larger move in the stock to become profitable.
- Defined Risk: For both strategies, your maximum possible loss is strictly limited to the total premium you paid for the call and the put.
- Beware the "IV Crush": This is the biggest risk, especially around known events like earnings. Implied volatility (IV) inflates the price of options before the event. After the news is out, this IV collapses, "crushing" the option's value. Your stock move must be bigger than what the market already priced in to overcome this crush.
"You have this really strong conviction that a huge move is coming. But here's the catch, you have absolutely no idea which way it's going to go up down."
Timestamped Summary
- (01:15) The Core Concept: Profiting from movement, not direction.
- (02:37) The Long Straddle: Buying a call and put at the same strike (at-the-money).
- (06:10) The Long Strangle: Buying a call and put at different (out-of-the-money) strikes.
- (09:03) Straddle vs. Strangle: A direct comparison of cost, break-evens, and trade-offs.
- (10:16) When to Use Them: Earnings, FDA announcements, and "coiled spring" charts.
- (10:42) The #1 Risk: Understanding the "IV Crush" (Implied Volatility Crush) and why you can still lose money.
- (17:11) How to Trade Them Smartly: Picking the right stock, checking the expected move, and managing exits.
What's your biggest takeaway on trading volatility? Join the conversation in our free community! If this episode helped you, please leave us a 5-star review on Apple Podcasts!
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