Straddles, Strangles and Iron Condors

EDUCATION, NOT ADVICE · Options can lose all of their value quickly. The example stock. Every price in this course comes from the Black-Scholes model for one example stock: price $100, volatility 25% a year, interest rate 4%, no dividends, 90 days to expiration. Real quotes differ. Full disclosures →

The long straddle

You buy the 100 call and the 100 put. The total cost is $988. You make money if the stock moves far enough in either direction.

Buy the 100 call and the 100 put, for $988. The chart shows the profit per contract at expiration for each stock price. The dots mark the break-even prices.

You break even at $90.12 and $109.88. So the stock must move more than $9.88 by expiration. The one standard deviation move from lesson 5 is $12.41. Even so, the model gives a profit in only 43% of cases.

The cost of a straddle is the price of a move. It makes money only if the stock moves more than the cost per share.

The long strangle

A strangle uses two strikes out of the money: the 95 put and the 105 call. It costs $572, which is less than the straddle. But the stock must move further, to below $89.28 or above $110.72. The model gives a profit in 39% of cases.

The iron condor

An iron condor is a bet that the stock stays in a range. It is a bull put spread and a bear call spread together. You sell the 95 put and the 105 call, and you buy the 90 put and the 110 call for protection.

Sell the 95 put and 105 call, buy the 90 put and 110 call, for a net credit of $271. The chart shows the profit per contract at expiration for each stock price. The dots mark the break-even prices.

You receive $271. You keep all of it if the stock ends between $95 and $105. You break even at $92.29 and $107.71, and the largest loss is $229.

In the model, the condor ends with a profit in 47% of cases. Short strikes further from the stock win more often, but they pay less.

Stock at expiration	Long straddle	Long strangle	Iron condor
$70	+$2,012	+$1,928	-$229
$80	+$1,012	+$928	-$229
$90	+$12	-$72	-$229
$95	-$488	-$572	+$271
$100	-$988	-$572	+$271
$105	-$488	-$572	+$271
$110	+$12	-$72	-$229
$120	+$1,012	+$928	-$229
$130	+$2,012	+$1,928	-$229

The short straddle

A short straddle is the other side of the long straddle. The seller receives $988 and makes a profit if the stock ends between $90.12 and $109.88. The loss has no limit if the stock rises far. The iron condor caps that loss with its two long options.

Key points

Straddles and strangles make money on a large move in either direction.
An iron condor makes money when the stock stays in a range.
The price of each trade already includes the move that the market expects.

Sources

Fischer Black and Myron Scholes, The Pricing of Options and Corporate Liabilities, Journal of Political Economy, 1973, for the model that gives every price in this course.