Risk and reward have a direct relationship. With more risk, there should be more reward. Here we compare Straddles to Strangles and note the differences between the risk and reward of each strategy.
When we compare Strangles and Straddles it gives a great description of the relationship between risk and reward. Strangles may be considered a less risky versions of Straddles. The risk for both is undefined as they both have potentially unlimited losses, but because of the role implied volatility plays they have different expectations.
A table comparing Straddles and 25 Delta Strangles in SPY was displayed. The table included the break-even distance from the stock price, difference in the break-even and the initial probability of profit (POP) at order entry. The table showed that the Strangles had a higher initial POP.
Straddles are much more expensive relative to Strangles because of the increased risk. A second table was shown, comparing the average credit received, profit target management, profits when managed at 25% and 50%, buying power reduction and return on capital (ROC).
Watch this segment of “Options Jive” with Tom Sosnoff and Tony Battista for the important takeaways and a better understanding of the the trade-off between risk and reward on Straddles and Strangles.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.