SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Straddle, Strangle Or Reverse Iron Condor (RIC)


I'm asked many times how we choose between Long Straddle, Long Strangle or Reverse Iron Condor (RIC) for our pre-earnings plays. It's always a balance between risk/reward. All of them benefit from IV jump (vega) and/or price movement (gamma). The biggest (and basically the only) enemy is the negative theta.

First, a reminder:

 

Straddle construction:

Buy 1 ATM Call
Buy 1 ATM Put

long-straddle.gif

 

Strangle construction:

Buy 1 OTM Call
Buy 1 OTM Put

long-strangle.gif

 

Reverse Iron Condor construction:

Buy 1 OTM Put
Sell 1 OTM Put (Lower Strike)
Buy 1 OTM Call
Sell 1 OTM Call (Higher Strike)

reverse-iron-condor.gif

 

When buying a straddle, we are buying calls and puts with the same strikes and expiration. When buying a strangle, we are buying calls and puts with different strikes. The strangle will have the largest negative theta (as percentage of the trade value, not absolute dollars). Further you go OTM, the bigger the negative theta. If the stock moves, the strangle will benefit the most. If it doesn't it will lose the most. I found that if I have enough time before expiration, deltas in the 25-30 range provide a reasonable compromise.

 

For lower priced stocks, I would prefer a ATM (At The Money) straddle (buying the same strikes). Strangle on a $20 stock might be very commissions consuming, plus the negative theta might be too big.

 

Please note that when I'm talking about the theta being larger or smaller, I'm always referring to percentages, not dollar amounts. In absolute dollars, the theta is always be the largest for ATM options. However, since those options are also more expensive in dollar terms, percentage wise the theta will be the smallest.


Generally speaking, dollar P/L is usually similar for strangles and straddles. However, since strangles are cheaper in dollar terms, percentage P/L will be higher for strangles. This applies to both winners and losers, which makes a strangle a more aggressive trade (higher percentage wins but also higher percentage losses). If the stock price moves significantly, strangles will likely produce higher returns. But if the stock doesn't move and IV increase is not enough to offset the negative theta, strangles will also lose more.
 

For higher priced stocks (over $100) I will usually do RIC. Since you sell a further OTM strangle against the purchased strangle, this reduces the theta of the overall position. It might be the least risky position and still benefit from IV jump like AMZN trade. I prefer to have spreads of $5 for RIC.

 

Since I don't know what will happen with the stock I play, I prefer to have a mix of all three. In case of a big move, strangles will provide the best returns. When IV is low, RIC will provide some protection against the theta while still having nice gains from time to time.

 

Remember: those are not homerun trades. You might have a series of breakevens or small losers, but one down day can compensate for the whole month. This is why I want to be prepared when it happens. In August I had 4 doubles in two days (but I played mostly strangles).

 

When you want to trade earnings and expect a big move, those strategies can provide excellent returns. RIC has limited profit potential, but when the stock moves less than expected, it can provide better returns than straddle or strangle with less risk.

 

The bottom line:

 

Strangle is the most aggressive trade, with higher risk and higher reward. It has the highest negative theta (as percentage of the trade price) so it will lose the most if the stock doesn't move and/or IV doesn't increase enough to offset the theta. 

 

RIC is the most conservative trade. Straddle falls in the middle, and many times it provides the best risk/reward.

 

Let me know if you have any questions.

 

Related articles

 

Want to learn more? We discuss all our trades on our forum.

 

Join Us

 

What Is SteadyOptions?

12 Years CAGR of 115.5%

Full Trading Plan

Complete Portfolio Approach

Real-time trade sharing: entry, exit, and adjustments

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Subscribe to SteadyOptions now and experience the full power of options trading!
Subscribe

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • When Investors Lose Their Nerve

    It was a rough end to the week for markets, with a sharp sell-off on Friday reminding investors just how quickly sentiment can turn. For anyone who sold in late summer anticipating a correction and then bought back in at the start of October, that one-day drop might have felt like confirmation that they can’t win.

    By Kim,

    • 0 comments
    • 261 views
  • Uncovering Common Cryptocurrency Trading Mistakes For Beginners

    Are you tempted by the shining allure of crypto trading? You aren’t alone. Decentralized cryptocurrencies hold perhaps the most tempting investment pull of a generation, especially amongst young or beginner investors. After all, by painting a different way to buy and sell, cryptocurrency offers something new that we’re all keen to get in on. 

    By Kim,

    • 0 comments
    • 6920 views
  • Buy Call, Sell Put Strategy Explained | SteadyOptions

    The Sell Put And Buy Call Strategy is an example of a synthetic stock options strategy: using call and puts options to mimic the performance of a position, usually involving the purchase of a stock. We saw this when looking at the synthetic covered call strategy elsewhere.

    By Chris Young,

    • 0 comments
    • 67316 views
  • Long Straddle Options Strategy | Maximize Profits with Big Moves

    Straddle Options Definition
    An options straddle strategy is buying (or selling) both a put and call option with the same strike price and expiration date for the same underlying asset, and paying both the put and call premiums.

    By Pat Crawley,

    • 0 comments
    • 67810 views
  • Gamma Scalping Options Trading Strategy

    Gamma scalping is a sophisticated options trading strategy primarily employed by institutions and hedge funds for managing portfolio risk and large positions in equities and futures. As a complex technique, it is particularly suitable for experienced traders seeking to capitalize on market movements, whether up or down, as they occur in real-time.

    By Chris Young,

    • 0 comments
    • 30636 views
  • Long Gamma vs Short Gamma: Options Strategy Explained

    Gamma is one of the primary Options Greeks, which measure an option's sensitivity to specific factors that could affect an option price. Despite traders hyping up several different Greeks and second-order Greeks like "Vanna" and "charm," there are only four primary Greeks that you need to be familiar with to understand options trading.

     

    By Pat Crawley,

    • 0 comments
    • 50158 views
  • Predicting Probabilities in Options Trading: A Deep Dive into Advanced Methods

    In options trading, the focus should not be on predicting the exact closing price of a ticker on a given date - a near-impossible task given the pseudo-random nature of markets. Instead, we aim to estimate probabilities: the likelihood of a ticker being above a specific value at a certain point in time. This perspective turns trading into a probabilistic exercise, leveraging historical data to make informed decisions.

    By Romuald,

    • 1 comment
    • 17001 views
  • SteadyOptions 2024 - Year in Review

    2024 marks our 13th year as a public trading service. We closed 136 winners out of 187 trades (72.7% winning ratio). Our model portfolio produced 116.7% compounded gain on the whole account based on 10% allocation per trade. We had only one losing month (of 0.6% loss) in 2024. 

    By Kim,

    • 0 comments
    • 6487 views
  • Wheel Strategy Options: Master Wheel Trading Explained

    The “wheel” trade is variously described as a beginner’s strategy, a combination to exploit features of both calls and puts, and as “perfect” solution to the well-known risks of shorting calls, even when covered. The options wheel strategy is an income-generating options trading strategy that both beginners and experienced traders can leverage for profit.

    By Pat Crawley,

    • 0 comments
    • 76125 views
  • Why Dollar Delta Will Change Your Trading

    Delta is one of the four main option Greeks, and any serious trader needs to have a thorough understanding of this greek if they hope to have any chance of success in the trading options. If you’re a beginner, you can visit my blog to learn more about understanding option delta

    By GavinMcMaster,

    • 0 comments
    • 36612 views

  Report Article


We want to hear from you!




Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Add a comment...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...

Options Trading Blogs