Options trading helps us profit even when the stock prices do not move. We share the differences between two neutral strategies, Straddles and Strangles, and why we prefer trading the Strangles in our portfolio.
Contents
What Is a Straddle?
A Straddle is a combination of selling an ATM Put and an ATM Call to generate a high premium. If the stock price moves very slightly and stays within the premium we received, then we can close the Straddle for a profit.
The premium received from selling ATM Put and Call would define the range of profit. As long as the DIS stock price does not fluctuate greatly before expiration, the neutral trade would be profitable.
What Is a Strangle?
A Strangle is a combination of selling an OTM Put and an OTM Call to define a range you can profit from. As long as the underlying price does not exceed or drop below the strike prices of Put and Call before expiration the two options contracts will go down in value and we profit as an options seller.
The OTM Put strike defines the lower boundary of the price movement. The OTM Call strike defines the upper boundary of the price movement. If the underlying stock price doesn't move beyond the boundaries, the Strangle will be profitable.
Differences Between a Straddle and a Strangle
A Straddle and a Strangle differ by maximum profit, probability of profit and adjustment frequency.
| Straddle | Strangle | |||
|---|---|---|---|---|
| Maximum profit | High | Low | ||
| Range of profitability | Narrow | Wide | ||
| Adjustment frequency | High | Low | ||
A Straddle has the greater theoretical maximum profit, but the profitability drops sharply with any small price movement. So the probability of profit is usually smaller than a Strangle.
When the stock price moves, at least one leg of the Straddle becomes ITM, so the contracts have to Buy to Close before expiration no matter what.
On the other hand, while the stock price stays within the two strikes of a Strangle, we can wait for the options to depreciate to zero at expiration. So a Strangle trader doesn't need to adjust the trades very often.
Even though both strategies can profit from the lack of price movements, they can have unlimited losses if a big price move does happen.
Trading an Iron Butterfly or an Iron Condor can be a good way to limit your losses just in case things go unexpectedly.
How to Find High Probability Strangles
We use the Options Scanner to find high-probability neutral opportunities.
- We want to choose opportunities with greater than 30 DTE to get the safest theta decay.
- We can filter IV Perc >67% to find opportunities that have a high chance of contracting IV and vega in our favour.
- By choosing a Market Cap larger than 10 billion, we avoid choosing stocks that can get manipulated.
- We also prefer stocks with Days To/Since Earnings >30 days so the earnings calls don't provide surprises.
Finally, we can sort the Strangles ROC by descending order to get a shortlist of the highest return Strangles.
Best Strangle Options Right Now
Sorting the Strangle ROC gives us a list of low-risk, high-return 0.20 delta Strangles to enter.
A high return Strangle with relatively low risk right now is ARM. A short Strangle with 0.20 delta:
- Sell a $90 Put that expires next month.
- Sell a $140 Call that expires next month.
- Uses $1,061 of Buying Power.
If the ARM price does not escape the Put and Call strike prices, the trade has a maximum return on capital of 51%.
We prefer selling a Strangle over a Straddle for the wider profitable range and the less frequent adjustments. You might consider trying the Options Scanner to find more low-risk, high-return neutral options to trade.
