EXHIBIT 15.8 Long strangle at-expiration diagram.
The underlying has a bit farther to go by expiration for the trade to have
value. If the underlying is above $75 at expiration, the call is ITM and has
value. If the underlying is below $65 at expiration, the put is ITM and has
value. If the underlying is between the two strike prices at expiration both
options expire and the 1.00 premium is lost.
An important difference between a straddle and a strangle is that if a
strangle is held until expiration, its break-even points are farther apart than
those of a comparable straddle. The 70-strike straddle in Exhibit 15.1 had a
lower breakeven of $65.75 and an upper break-even of $74.25. The
comparable strangle in this example has break-even prices of $64 and $76.
But what if the strangle is not held until expiration? Then the trade’s
greeks must be analyzed. Intuitively, two OTM options (or ITM ones, for
that matter) will have lower gamma, theta, and vega than two comparable
ATM options. This has a two-handed implication when comparing straddles
and strangles.
On the one hand, from a realized volatility perspective, lower gamma
means the underlying must move more than it would have to for a straddle
to produce the same dollar gain per spread, even intraday. But on the other
hand, lower theta means the underlying doesn’t have to move as much to
cover decay. A lower nominal profit but a higher percentage profit is
generally reaped by strangles as compared with straddles.