 Hey everyone, welcome to another video lesson from Navigation Trading. In this video I want to discuss the difference between an option strangle and a straddle and talk about which one is better. So first let's review the difference between a strangle and a straddle and then we'll jump onto the trading platform and go over some examples. Now there are two ways to enter a strangle or a straddle and that is to go short where you're actually selling it to open or go long where you're buying the spread to open. Let's start by doing a comparison of the short strangle versus the short straddle. In both cases we like to enter in a market neutral situation. We like to enter both a strangle and a straddle with high implied volatility. When you're selling a short strangle or a straddle the risk is theoretically undefined and then there are two main differences between the two. On a short strangle you're going to have a little bit higher probability of profit on the trade whereas with a short straddle your probability of profit is going to be lower and with a short strangle you have a lower profit potential than with a short straddle where you have a higher profit potential. Just remember there's always a tradeoff between risk and reward if your probability of profit is higher than typically your profit potential is lower and on the flip side if your probability of profit is lower then you should have a higher profit potential. Let's go to the trading platform and take a look at an example to make this all make sense. So we are on the TD Ameritrade thinkorswim platform and I have set up two theoretical positions on the analyze tab first a strangle second a straddle and the orders are colored red indicating that they are short. We've checked the box for the short strangle so you'll see the visual representation in the graph up above. So on the graph you'll notice a couple of things. One we have our price slices set to our break even points and we have our calendar set to the expiration date of these particular options and by doing that the platform gives us our probability of profit if we held this trade all the way to expiration which in this case is a little over 68%. Now in reality we are rarely going to hold these trades all the way to expiration so our probability of making money on this trade in real life trading is much higher than 68% but in this case for this example if you were to hold it all the way to expiration your probability of profit is just over 68% and if you keep your eyes on the little box with the teal numbers down here in the bottom left hand corner you can see that our max potential profit at expiration is $1955 meaning if price stays in this range between now and the time that the options expire we're going to keep that entire $1955. Now let's take a look at the short straddle to compare the difference. So if I simply check on the box next to the straddle you'll see the visual graph pop up now. So as you can see instead of a long flat probability of max profit we now have more of a tent shape profit diagram and we have to take our price slices and move them to the break even points to determine our probability of profit. Our probability of profit at expiration went from a little over 68% down to just over 45%. So with a straddle we have a smaller range to make a profit in but you can see the max profit that we can attain on this trade is a little over $8,000 if we pinned right at the short strikes. So in trading short strangles and short straddles one is not necessarily better than the other it just depends on your underlying assumption if you think the underlying symbol is going to trade in a narrow range or if you want to trade in a much wider range during your time in the trade. At navigation trading we definitely trade more short strangles than we do short straddles because we like that higher probability of success and we're okay capping our profits at a lower potential. Okay now let's go back to the slides and determine the difference between a long strangle and a long straddle. Both a long strangle and a long straddle benefit from a large one directional move. So if we put on a long strangle or long straddle we don't care which direction it moves we just want it to make a large move. Both benefit from implied volatility expansion the risk on a long straddle and a long strangle are both defined and both have unlimited profit potential. The main difference is that the probability of profit on a long strangle is lower and it's a little bit higher on the long straddle. So let's go back to the platform to take a look at an example. In this case we're looking at Amazon ticker AMZN. I have the box checked for the long strangle and you can see both of these are colored green indicating that we're entering a long position instead of short. And if we take a look at our graph here we've set our price slices to the breakeven points and you can see that the risk is defined. In this case the max we can lose on Amazon on a long strangle is $4,635. However remember with a short strangle we wanted price to stay in this specific range to make a profit. In the case of a long strangle we need a large directional move in one direction or the other and we need to be outside of these price slices at the time of expiration to make any money. So in this case we have over a 76% chance of losing money on this trade and just a 24% chance of making money at expiration. And navigation trading really the only time that we will buy strangles and straddles. So the only time we'll really go long strangles and straddles is when we anticipate that implied volatility is going to be increasing and we anticipate a large move to happen fairly quickly. Because if price moves fairly quickly in one direction or the other and we can get out before expiration that's what we're looking for if we want to trade a long strangle or a long straddle. As you can see it's a very low probability trade and for you to make any money the price has to move very quickly and in a large way for you to make money. So let's take a look at the long straddle. If we uncheck the strangle check on the long straddle box and then let's move our price slices to the break even points. What you'll see is now we have a probability of a little over 59% and that is if price stays within this range we're still losing money over 59% of the time. However the range is more narrow so if we do have a decent move outside of those break even points before expiration that's when we can profit on the straddle. Again similar to a long strangle the long straddle is a lower probability play and we have a course about how to trade options on earnings announcements and that's one of the key places that we will utilize this type of a strategy. We typically don't place this type of trade on an index or an ETF because the probability of actually making money in those situations is very low. So I hope this lesson was helpful in helping you determine when to enter a long strangle versus a long straddle and a short strangle versus a short straddle. If you want to learn the step-by-step details of how to trade each of these strategies come check us out at navigationtrading.com you can try out our pro membership for just one dollar for 14 days. We hope to see you on the inside. Happy trading!