enjoy profits from movement and losses from lack of movement that were
similar to those of a straddle—just nominally less extreme.
For example, if Acme stock rallies $5, from $74.80 to $79.80, the gamma
of the 75 straddle will grow the delta favorably, generating a gain of 1.50,
or about 25 percent. The 70–80 strangle will make 1.15 from the curvature
of the delta–almost a 50 percent gain.
With the straddle and especially the strangle, there is one more detail to
factor in when considering potential P&L: IV changes due to stock price
movement. IV is likely to fall as the stock rallies and rise as the stock
declines. The profits of both the long straddle and the long strangle would
likely be adversely affected by IV changes as the stock rose toward $79.80.
And because the stock would be moving away from the straddle strike and
toward one of the strangle strikes, the vegas would tend to become more
similar for the two trades. The straddle in this example would have a vega
of 2.66, while the strangle’s vega would be 2.67 with the underlying at
$79.80 per share.