An In-depth Volatility Analysis: Strangle vs. Straddle
An In-depth Volatility Analysis: Strangle vs. Straddle
By:Kai Zeng
Dampen volatility by exiting positions ahead of the expiration date
- Straddles, because of their higher delta and gamma, tend to show greater volatility in P/L, which can intensify as the expiration approaches.
- Managing the timing of your exit from these positions is crucial.
- For high delta strategies like straddles, consider closing out earlier to maintain volatility within a manageable range.
The primary distinction between Straddles and strangles lies in their construction and the resulting risk-reward profiles. A straddle, which involves selling both an at-the-money (ATM) call and an ATM put option at the same strike price, often displays more significant volatility compared to a strangle, owing to its higher delta and gamma values.
Delta measures how much an option's price is expected to move per one-point change in the underlying asset. Gamma reflects the rate of change in delta itself as the underlying price varies. Therefore, even minimal price fluctuations can lead to substantial profit or loss (P/L) swings in a straddle, making it a more volatile strategy.
On the other hand, a strangle, which consists of selling calls and puts with different strike prices, tends to be less sensitive initially because the options are out of the money.
.png?format=pjpg&auto=webp&quality=50&width=1000&disable=upscale)
In an analysis of SPY 45-day options, we observed the weekly profit/loss (P/L) as well as volatility changes in strategies with different delta values: 16, 30 and the straddle with a delta of 50.
Consistently, we noted the volatility in P/L gradually escalates as the expiration date approaches. However, this rise in volatility becomes less pronounced as the expiration draws near.
_(1).png?format=pjpg&auto=webp&quality=50&width=1000&disable=upscale)
What's particularly noteworthy is how the volatility spikes with higher delta strategies. By expiration, the P/L volatility of a 30Δ strangle was found to be double that of a 16Δ strangle, while a straddle (50Δ) experienced even more significant spikes in volatility each week, peaking near 80% as expiration loomed.
_(2).png?format=pjpg&auto=webp&quality=50&width=1000&disable=upscale)
_(3).png?format=pjpg&auto=webp&quality=50&width=1000&disable=upscale)
Given these observations, an effective risk management tactic is to consider exiting your positions ahead of the expiration date—this could significantly dampen volatility. For straddles, which are particularly sensitive because of their high delta, exiting even earlier than 21 days to expiration (DTE) can strike a better balance between profitability and volatility.
_(4).png?format=pjpg&auto=webp&quality=50&width=1000&disable=upscale)
Kai Zeng, director of the research team and head of Chinese content at tastylive, has 20 years of experience in markets and derivatives trading. He cohosts several live shows, including From Theory to Practice and Building Blocks. @kai_zeng1
For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.
Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.