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Buy Straddle
Buying a strangle consists of purchasing a call and a put in different strikes within the same contract month.
It is generally an OTM call and an OTM put, but not limited to
such. Since both options are bought the buyer will pay a premium. This is a non directional, volatility spread that is looking for prices to move in either direction.
This strategy is normally implemented when the trader believes that implied volatility is too low and/or the futures market is ready to move.
Breakeven point at expiration occurs when futures price is either the same distance lower as the
put strike or the above the call strike, as the premium paid.
Maximum profit = unlimited only to the extent in which the futures market can move, minus premium paid.
Maximum loss = premium paid.
- In The Money: One or both of the strikes may be ITM.
- At The Money: Technically, a strangle can't be at the money because two different strikes are sold, however, it is often reerred to as ATM if either the put or call strike is equal to the futures price.
- Out Of The Money: The most common use with call strikes higher than future prices and put strikes.
- Delta is positive above the call strike and negative below the put strike. However, the volatility slope (difference between volatility in different strikes) can affect the deltas when the futures price is not clearly closer to one strike.
- Gamma is positive. Underlying price movement helps.
- Vega is positive. Higher implied volatility helps.
- Theta is negative. The passage of time hurts.
