 Hey everyone in this video where you can be talking about a very popular product and get a lot of questions about this What are options straddles and strangles? So if you're interested in this topic and want to learn about what they are How to use them when to use them why to use them and whether you should be a buyer or seller of options straddles and strangles Then you're gonna want to stick around and watch this video. So let's go Hey everyone, I'm Lilo founder of smart options seller comm and options Website to help you up your game as an option trader So as I said and you can see right here on the screen in front of you, let me move myself over here We're gonna be talk about Straddles and strangles today. We're gonna look at some definitions. We're gonna look at some option chains We're gonna look at some P&L charts we look some option graphs as well and We're gonna do some calculations and show you why and how to calculate options straddles and strangles Why you want to use them when to use them? And it is it more beneficial to be a buyer or seller of an options straddle and strang or strangled So let's just jump right in and talk about what they are and we will go from there So as I usually do I have these cheat sheets here the smart options seller guide to Straddles and strangles is what we do each week. So for those of you, you know, that may not know yet you know options come in two flavors calls and puts and Most of the time people use them for directional types of trades So if you're bullish on a stock you may buy a call option if you're bearish on a stock You may buy a put option and conversely you can be a seller as well So if you're bearish on a stock, you could sell a call option All right, if if you're bullish on a stock, you can sell a put option That's something that we do here at the smart ops and sell we specifically sell put options But there are times when you know, there's a stock out there You're looking at the stock chart and you're thinking you know what I think this stocks gonna move really big But I'm not sure which direction it may move in and you can use as a buyer You can buy an option straddle them or strangle that that could pay off for you if the stock moves big in either Direction so what you'll be doing as a buyer You'll be buying both the call option and a put option at the same time Hoping that the stock's gonna move big in one direction or another and if the stock does move far enough in The right time frame then you can be a winner as a buyer of an option straddle or strangle now on the other side As a seller you can sell an option straddle or strangle Which means you're gonna sell both the put and the call Hoping that the stock doesn't really go anywhere and the option values for each to put in the call gets smaller and smaller Meaning you can buy the whole straddle or strangle back and lock in a profit So there's two sides of the coin here Some people like to buy straddles because they just don't know where the stock's gonna go But some people like to sell straddles and strangles because they know the stock's not gonna go anywhere And they can make a profit by the time decay value of those option contracts So let's just talk about a little bit, you know what they are a Straddle is set up right here. I'm talking at the top line here a straddle set up where you can buy or sell The same strike prices using the same expiration date. So if the stock's at a hundred You're gonna use the 100 strike call and the 100 strike put and they're both gonna be using the same expiration date And and for a strangle you're typically going to use, you know An out of the money call and put option so if the stock's at a hundred you're gonna buy or sell the 110 call strike and the 90 put Call strike you can buy or sell that so we're gonna look at some some option charts to show you what that actually looks like When you buy or sell it So let's just talk a little bit about the risks and rewards here because some people don't understand, you know Why you would want to be a buyer or seller of each now as a buyer of an option Whether you buy a single option or spread or straddle or strangle when you're a buyer of an option you have unlimited reward potential To however high or however low the stock can go if you get that direction, right? Your reward is unlimited and your risk is capped and limited meaning whatever you pay for the option or options is That's the most that you can lose you can never lose more than what you pay for the options now on the flip side the seller of Option contracts have unlimited risk potential Meaning if the stock moves against you you have unlimited risk potential Which is not a great thing and you only have limited reward potential So whatever you sell the option for whether you sell one option or spread or straddle or strangle The most you can ever win when you sell an option is whatever you collected or whatever the option buyer paid you But you have unlimited risk. So you may be asking Why would someone want to have unlimited risk when trading options? Well, because a lot of the times the probability of winning is very high What we like to do with the smart ops sells we like to sell put options, but we know As a first stock it can't fall any further than zero So when we sell a put option what we're basically doing is obligating ourselves to buy a specific stock at a specific price And we know what our our maximum risk is the stock can't go any lower than zero So we know what what we can potentially lose on the upside We never ever ever sell naked call options Meaning we just never sell call option because the stock could go up forever and we have unlimited loss potential So if you're if you're thinking about selling straddles or strangles You want to be very very careful because your your risks and loss could be unlimited. So just want to get that out They're up front. Okay, so we're talking about, you know, so so most people would think well They just want to be a buyer But a lot of times buying options fails miserably like up to 95% of the time If you have no idea where the stock's gonna go or you choose the wrong expiration date You could be throwing good money after bad money Just trying to figure out where the stock's gonna go you buy straddle meaning you're gonna buy both call and a put and they both End up expiring worthless. You're gonna end up losing a lot of money So that's why people like to sell options because they have They're taking advantage of the these option buyers that have no clue about what they're doing So option selling does have its advantages. All right The one thing that you need to know is that if you're gonna buy a straddle or a strangle You have to have a catalyst for that and I'm right here You need to know that this stock is going to move and it's going to move fast and soon and that's the only reason why you would be a buyer of an option because If the stock doesn't move that options is gonna start wasting away and you're gonna start losing money The value of that option is gonna start decreasing as a and as the holder or the buyer of that option You're just gonna be holding on to something that's losing value So you want to make sure that you have some kind of catalyst that you know Somehow for some reason the stock's going to move and it's going to move quick And that's the reason why you want to buy options buy straddles whatever and we're gonna look at a scenario Where a lot of people end up buying straddles or strangles right before a stock announces their earnings because typically after Company announces earnings the stock will usually rise or fall pretty quickly That's why people will concentrate on buying straddles or strangles right before an earnings announcement We're gonna look at some numbers there as well. All right, so right down here buyers typically use a strategy for earnings But at the same time, there's always there's always a caveat here Before earnings comes out the volatility of those options start to increase meaning those option prices get a lot more Expensive because everybody's clamoring to buy puts and calls because they don't know which way the stock's gonna move after earnings So all that buying pressure increases the prices of those options and once the earnings announcements come out We know where the stock is gonna go all that volatility gets taken out of the options called volatility crush So all those high prices as an option buyer you paid right before earnings Gets deflated and all that value comes out regardless of where the stock moves all that volatility comes out So the option price is deflate after earnings. So you're you're fighting with that as well That's another reason why options sellers like to sell straddles and strangles because they like to take advantage of that volatility crush Okay, so if you bought an option for five dollars a contract right before earnings and then tomorrow when the earnings come out That option could be worth three dollars Just due to the fact that the announcement is now known and we know what the earnings are So you got to be careful of that as well. All right, and the other thing you can do is You can use a probability calculator to help you figure out, you know, what are the chances of the stock moving? you know to x-point higher or lower in the future based on the current volatility and You know the past movement of the stock and we'll pull up the calculator and show you that now lastly one thing I want to say here is that you know if you want to sell options You know because you want to take advantage of a stock not moving or you want to take advantage of that volatility crush Using iron condors is probably a safer strategy I should say condors are selling a call spread and a put spread at the same time You're taking advantage of a range of a stock moving in so that's another discussion for another day And lastly we're gonna use a website called option creator calm to show us You know what they the payoff graph looks like for a straddle and strangle, so let's just go on to the next phase here We're gonna look at let's open up a chart here. We're gonna look at Using Disney Walt Disney as our example. Okay, so typically What you would want to do you want to pick a stock? That has the potential to move really far really quickly in the near future now by looking at charts How do you do that? Well? Typically as I said you can do it right before earnings if you want because you know the stocks gonna move big One way or the other typically okay, or the other thing you can use if you see a stock kind of Not really going anywhere for a while you can see Disney has some good movement You know up and down but right here It has this little little period of congestion Meaning that the the range is that the stock trades in is getting tighter and tighter and that means Soon at some point the stock should explode higher or lower So you're banking on you're going through your charts and you're looking for charts that have like a consolidation period and Then you know eventually Disney's gonna explode one way higher or lower now That could be you know They could be waiting for Disney's earnings to come out or there's some other catalyst That it that Disney's gonna be making an announcement in the near future We just don't know what that is the other thing that you can look for on charts is something called a congestion pattern So we can draw this here and we can draw this here So that's typically what's called a congestion pattern where the stock kind of gets like I said in tighter and tighter ranges It creates this Triangle pattern which once it gets to the apex here it'll blast out higher or lower one way the other so a lot of People will look at charts they'll look for these congestion patterns and then they'll buy a straddle Hoping that the stock's gonna move really big one way or the other. Okay, so let's go to the option chain for Disney And take a look at some of the numbers How you figure out, you know, what a straddle will cost you or a strangle And whether you want to be a buyer or sell out of it. So we're in the interactive brokers option chain here I've got my Disney chart, uh, Disney option chain pulled up. We got put options on the right Call options on the left. Now these are leftover prices from yesterday's trading action April 14th 2023 And typically most people when they buy a straddle or strangle They use, you know, the at the money or near the money options So with Disney trading right around $100 a share What we would do is we go to the hundred strike So we got the hundred puts here and the hundred calls over here And we're going to use a you know use a an expiration Like three months in the future July 2023 97 days until that expiration Now if you're unsure about where the stock may be going You probably want to give yourself some more time for the stock to move because Disney can keep me andering, you know sideways for a while without any action So if you choose shorter term expiration options, those things are going to take decay real really fast on you And you're going to lose money quickly as an option buyer So as an option buyer, you want to probably give yourself a little more time for the stock to move So we're looking at, you know, these July options 100 puts are worth about, you know, $5.50 per contract and the 100 calls are worth about $6.70 per contract and you're going to be buying both of them as an option buyer So that's roughly $5.50 and $6.70 $12.20 per straddle So it's $1220 So the cost to you as an option buyer is $1220 and To buy the put and the call 100 strike. So at this point You know that Disney needs to move Either $12.20 higher or $12.20 lower in order for you just to break even as the option buyer Okay, so $12 higher is going to be $112 a share and $12 lower is going to be about $88 a share Do you think Disney can move $12 higher or lower in the next 97 days in order for you just to break even Okay, Disney needs to move farther than those levels in order you in order for you to start making money as the option buyer All right. So what we want to do is we want to take a look at We can go to Let's pull up a screen here. Okay. This is our free puts on ebook. We'll talk about that later We want to go to our option Chart here So I want to bring everyone up to speed on a website called option creator dot com You can see it up here option creator dot com good basic website To help you put in any kind of option strategy you want you can fill in the numbers here And it'll pump out the Graph right here. So I'm going to walk you through an example of how to create an option straddle Example, okay, we're talking about disney, but it doesn't really matter You can all you need is the numbers So the current stock price is 100 and we're going to buy here one contract of both the The call and the put at the 100 strike at the money 97 days to expiration We're going to use a volatility of roughly 30% That's typically where where disney's been trading and it's going to come up with the the option prices now in this case You can see the the full value of the call and the put added together is roughly $12 and 29 cents a little bit more expensive Than what we calculated at 12 20 Doesn't matter regardless So you come down here and it'll and once you hit enter after you put in all you can you can change all these numbers here, okay once you Type in a new number just hit enter and it'll adjust the chart below. So we scroll down So this is what a payoff graph of an option straddle looks like it looks like a v Okay, and at the apex of the v right here is the strike price 100 Okay, though your worst case scenario as an option straddle buyer is for the stock to finish that expiration Right at the strike price meaning right at 100 in this example If disney finishes at $100 at expiration 97 days from now Both the call and the put option will have a zero value It'll expire worthless and you'll lose the maximum you can lose which is the $1220 Now as you can see as the graph moves Up as the stock price goes down or as the stock price goes up You can see now your profit starts to get unlimited in either direction Okay, so you're hoping for disney to move your break even would be right around 112 112 and changes we discussed or 88 As we discussed so you can look at the prices down here at $88 The curve starts to move above the zero line meaning you're starting to move into profit above 112 or so Now you're starting to move into profit So you need to make sure that disney is going to move $12 or more than $12 in either direction in order for you to make money So you can see the graph here now the blue line is is today if you were execute the the trade today This is what your p&l would look like but at at expiration, which is what you really care about where Where you would make or lose money now you're going to lose money if If disney finishes between 88 to 112 dollars anywhere in between that level you're going to lose various amounts of various amounts of money Down in this range, but it has to get below 88 or above 112 in order for you to make money now a strangle We'll look at a strangle here. Strangle is just using slightly out of the money strike prices So here the the the call we use the 110 call The 110 call and we'll use the 90 put slightly out of the money hit enter Now you can see it's only four dollars and 88 cents roughly So it'll cost you 488 dollars strangle will cost less Because the stock is going to need to move further in order for you to make a profit as an option buyer As this strangle buyer. So if we scroll down to the chart here, you can see You can lose money in a bigger range between 90 If disney finishes between 90 and 110 in that $20 range on expiration You're going to lose the maximum you're going to lose the total amount that you put into the trade, which is 488 dollars Okay, and you can see where it starts to bend It'll cross that zero zero dollar amount at your break evens. So if the cost is 488 dollars, that's going to be Your break evens going to be 110, which is the strike price strike price, but plus 488 So 114 dollars and 88 cents is your break even on the upside And on the downside you take 90 minus 488, which is 85 thousand twelve cents roughly So disney has to fall below 85 dollars and change In order for you to make money or it has to get up to a Above 114 and change in order for you to start making money. So the strangle has a wider Area in order for you to make up a profit Disney has to move further in order for you to make a profit, but it'll cost you less So you have to decide do I want to pay more and but have a wider opportunity A wider area where I need disney to move in order to make money Or do I want to pay more in a straddle? But my my profit area Is easier to get to so you have to figure out what's better for you Now you can always change the strikes you can you can do the you know the 105 call And the 95 put Hit enter now it costs a little more, but you can see that your range of profitability um It gets smaller that means disney doesn't have to move as far in order for you to start making money So you have to figure out, you know, can disney really move that far? You know, am I buying something that has no chance of even occurring So on the flip side now, let me show you what it looks like for an option seller. So here we're going to sell And we're going to go back to the straddle We're going to do the hundred strikes. So as an option seller straddle seller You're going to collect the $1,220, but here's what your payoff diagram looks like If disney or the stock finishes at 100 at expiration, you're going to make the maximum which is $1,220 But if disney starts to move bigger in either direction You're you're starting to lose money Okay, unlimited amount of money at least As high as disney can go. We know disney can't go lower than zero dollars, but that still would be a massive loss For you even so So you have to be sure yourself as an option seller Do I think disney can move out of that $12 range higher or lower in the next 97 days? You know, that's something that you have to think about and so your probability zone is quite small You know between nine between 88 and 112 disney gets out of those either range You're going to start losing money in either direction. Okay, so let's look at the Let's look at the The strangle for the option seller Now as an option seller for a strangle you have a little bit wider probability zone Because disney has to move further in either direction in order before you start to lose money So now you have that uh area of about, you know, 114 to 85 before you start losing money still unlimited Losses on the either direction big moves in either direction. You're losing money as an option seller But now the question is, you know, what are the chances of that happening? What are the chances of disney moving that far in either direction? So that's where we go to the Probability calculator. Is this my probability calculator? Yep. Got it right here This is the smart option seller calm probability calculator. So we're we I filled in some of the numbers here disney at 997 days in the future and we'll look at We'll use the 30% volatility So here is where I put in the the upper and lower thresholds for the straddle Um, it was, you know, $87 and 80 cents on the downside, you know, we're using $12 and 20 cents as our Cost of the straddle. So you you you take $12 and 20 cents and add it to the 100 strike and take $12 and 20 cents And subtract it from the 100 strike. Okay, so that's 87 80 on the downside And 112 20 on the upside and when we hit go you're going to see here that The probability of disney in this case finishing below 87 80 is about a 20 probability And the chance of it finishing above 112 20 is is almost 23 Okay, so you as an option buyer or option seller you have to figure out is this 20 and 23 You know too little or too much for me To to take that trade as the option buyer is 20% Enough of a chance for you to say i'm willing to spend $1,220 to see if disney gets above or below these levels It's 20 20 and 20 and 23 sound like a good opportunity for you on the flip side For the option seller, there's only a 20 and 23 that disney will actually move out of that range So conversely you have an you know an eight you have about a 77 and an 80 chance of winning Because disney is not going to move out of that range So you'll make some money, you know some varying amounts of money depending on where disney finishes So as an option buyer you have 20 20 3% of winning option seller you have about a 77 78% to 80 percent chance of winning so you have to weigh out. Okay. Are those numbers good enough for me? And it's whatever you choose. So now before earnings, let's talk about the earnings opportunity here If you think that disney is going to explode one way or the other you can buy You can buy disney's straddle or strangle right before earnings and let's go back to the the option chain here Let's let's pretend that disney's earnings are coming out next week And we're going to the april 21 so six days from now. So next friday april 21st Now here's a a little trick to figure out, you know, how far the options market is basing or thinking that disney is going to move By this friday april 21st The best way you can do it is you look at the at the money straddle, which is the 100 strike put in call and it's worth about a dollar 37 here And you know, roughly a dollar 37 here for the calls as well. You add those two together. That's roughly two uh three dollars two dollars and 77 cents or something like that 2077 cents. That's that's how you calculate how much the option market thinks that disney is going to move by next friday Okay, two dollars and two dollars and 74 cents or two dollars and 75 cents The option market thinks that disney's going to move that far by next friday Do you think disney can move, you know, two dollars and seventy something cents by next friday? So that's what the at the money straddle is predicting. That's how you can use the market So if you think yeah, heck yeah, disney could move that far by next friday, then you can buy the straddle All right, so let's go quickly back to our our option calculator I just want to show you how that looks and you can get this information from the the oic website options education.org You can see the website right here. So, you know, what we did was Let's move this down to six days to expiration. Okay, this is your inputs are here. We've got a hundred dollar stock price hundred dollar strike price and days to expiration You can see a dollar 57 dollar 50. So we're talking this is okay a little bit different three dollar value here And you know, if you decide to buy that option straddle, let's let's bump this up because we know that Volatility is going to go up as earnings announcement gets closer So let's just say cost four dollars to buy that straddle two dollars for the call two dollars for the put You're paying four dollars But once earnings gets announced all of a sudden volatility drops down to 20 And now those You've lost a dollar on the call and a dollar on the put So you have to be aware of that volatility crush that I talked to you about Regardless of where Disney goes higher or lower The volatility is still going to come in and you're going to lose money just because of that drop in the volatility So you have to be aware of that if you're playing options or options straddles or strangles For expiration you have to be aware if you buy that option or that straddle of strangle right before earnings like the night before Before the market closes or whatever you're going to be You have to be aware that that volatility crush. So choose your options wisely. All right So I think that's it for the option straddle and strangle. Let's actually we can go to one more time The Option chain here. So how do you actually how do you actually buy or sell the straddles? Well, if you use interactive brokers, you know, there's a couple ways to do it You can actually go into the let's go back to july here. You can actually go into the strategy Builder Okay, and what you would do is you can click on The ask of the put and the ask price of the call and it'll set up this Straddle order right here It'll but you're not going to buy the 100 call on the 100 put And here it costs $12 and 15 cents per straddle, which is $1,215 Here's the chart little chart that I showed you about before or if you use the home screen like I do and I put in some of this numbers before you can actually go ahead and Create the straddle and strangle right here, which for some reason The strangle price is not showing up, but you can add the numbers here and it'll give you the full price All right, so there's a couple different ways that you can create it within interactive brokers All right, so that's all for me today I hope this has been helpful I hope it's giving you an idea of what straddles and strangles are all about You know whether you want to be a buyer seller, whether the probabilities are good for you How much it'll cost the p&l graphs The option charts, you know, you can use all these things to help you figure out whether you want to Be a buyer or seller as I said, let's go back to the The cheat sheet here if you're gonna if you're gonna sell these things You may want to consider the iron condors instead. These are double double It's a call spread and a put spread that you sell together You have locked in limited risk. So there's a little bit safer. All right, so lastly Let's go to our website smartopsonseller.com And I want to make sure everyone gets a free copy of our put song basics ebook That's what we concentrate on here at the smartopsonseller.com you can scroll down And put in your name and email address here. You do this at our website smartopsonseller.com All right, that's all for me today. Hope this has been helpful Leave me a comment Give me a thumbs up hit that like button subscribe if you wish send me an email. I will always answer All right, that's it for me today. This is lee lull signing off