by Don Fishback

A straddle is the purchase or sale of a put and a call of the same month, same underlying market and same strike price.  A strangle has the same characteristics with one exception: Different strike prices for the put and call.

Straddle Example

Assume your analysis indicates that volatility for Dow Jones Index options is very low and you expect volatility to increase sharply.  You are not sure if prices will move higher or lower, but want to take advantage of the coming increase in volatility.  You decide to buy December 86 straddle but do not want to pay more than 11 per spread for the position.  The 86 calls traded last at 4; the 86 puts at 7 ½.

To enter an option Straddle Order you would need to provide the information shown in the table below.

1. Account Number:12345
2. Market Action:Buy
3. Quantity:3
4. Month & Year:December 2016
5. Contract:DJX 86c
DJX 86p
6. Order Type:Limit
7. Open or CloseOpen
8. Price:11

Enter the order as follows:

ACCOUNT 12345

BUY 3 DEC 86 DJX CALLS to OPEN

BUY 3 DEC 86 DJX PUTS to OPEN

11 DEBIT

As with any multiple-position limit order you may only fill on one or two of the spreads but at a price no worse than 11 per spread.  Maximum risk in this example is the amount of premium paid – while the profit potential is unlimited.  When liquidating the position the order can go in as a spread or as individual options.

88 Strike Calls88 Strike Puts
87 Strike Calls87 Strike Puts
86 Strike Calls   Buy Calls86 Strike Puts   Buy Puts
85 Strike Calls85 Strike Puts
84 Strike Calls84 Strike Puts

Strangle Example

Assume that the S&P 100 Index has been chopping up and down in a range between 480 and 550.  Your analysis indicates that the market will remain in that range for several weeks and you decide to take advantage of the situation by selling OEX options on either side of the range.  The October 480 puts traded last at 15; the October 550 calls at 10.

To enter an option Strangle Order you would need to provide the following information:

1. Account Number:12345
2. Market Action:Sell
3. Quantity:2
4. Month & Year:October 2016
5. Contract:OEX 550 calls
OEX 480 puts
6. Order Type:Limit
7. Open or CloseOpen
8. Price:25

Enter the order as follows:

ACCOUNT 12345

SELL 2 OCT 550 OEX CALLS to OPEN

SELL 2 OCT 480 PUTS to OPEN

25 CREDIT

This position carries unlimited risk while profit potential is limited to the amount of premium received.  The order was entered as a spread and must be filled as a spread, although there is no guarantee that both, or either, spread will be filled.  If filled, the short options may be covered as a spread or as individual option orders.

550 Strike Calls   Sell Calls550 Strike Puts
540 Strike Calls540 Strike Puts
530 Strike Calls  530 Strike Puts
520 Strike Calls520 Strike Puts
510 Strike Calls510 Strike Puts
500 Strike Calls500 Strike Puts
490 Strike Calls490 Strike Puts
480 Strike Calls480 Strike Puts   Sell Puts