I vaguely remember from my Derivatives class in college, a Short Straddle being called a Strangle. Does the institute not call it that or was the name just eliminated?
They are not quite the same. A strangle is like a U while a straddle is like a V. I think strangle is out of the curriculum.
Well thats good news. Don’t need any more option payoff diagrams
It isn’t.
2017 Level III Curriculum, vol. 5, p. 305.
A long straddle (which the curriculum calls a straddle) has a payoff that looks like this: /.
A short straddle (which the curriculum calls an inverse straddle) has a payoff that looks like this: **/**.
A long strangle (which the curriculum calls a strangle) has a payoff that looks like this: _/.
A short strangle (which the curriculum ignores) has a payoff that looks like this: **/¯**.
(Note: I corrected the payoff diagrams, above. My original pictures were wrong; I don’t know what I was thinking at the time.)
Nice. One sentence in the book. They could probably get a 10 minute constructed response question out it.
Thanks S2000 for the Diagrams and pointing it out.
And remember, when in doubt, this is always the payoff diagram
¯_(ツ)_/¯
emmm, i think a long straddle is a V (benefiting with long call and put) whereas a short straddle (receiving premiums and betting against volatility) is a reverse V so something like this / \
Straddle use ATM calls and puts.
Strangle use OTM calls and puts.
Long straddle - betting on volatility
Short straddle - betting against volatility
Strangle Long or Short - same as Long and Short straddle but cheaper due to use of OTM options.
You’re absolutely correct.
I don’t know what I was thinking yesterday. I’ve corrected my drawings, above.
Thanks for the sharp eye!
no worries Bill