FRM Exam Part I · Trading Strategies

Straddles, Strangles and Other Option Combinations

Q: What is the difference between a straddle and a strangle?

A straddle uses a call and a put at the same strike. A strangle uses an out-of-the-money put and an out-of-the-money call at different strikes. The strangle costs less but needs a bigger price move to profit.

Q: What is the difference between a strip and a strap?

A strip is one call and two puts at the same strike, so it favors a price fall. A strap is two calls and one put at the same strike, so it favors a price rise. Both profit from large moves in either direction.

Q: When should you use a strangle?

Use a long strangle when you expect a large price move but are unsure of the direction, and want a cheaper entry than a straddle. Events such as earnings or policy decisions are typical examples. You accept a wider zone where you lose the full premium.

Q: How do you calculate straddle profit?

Find the absolute distance between the final price and the strike, then subtract the total premium paid for the call and put. A negative result is a loss, capped at the total premium.

Updated 11 October 2026 · Fact-checked

A combination mixes calls and puts on the same underlying. A straddle buys a call and a put at one strike. A strangle uses a lower put strike and a higher call strike. Strips and straps add extra puts or calls. Find breakevens by adding or subtracting the total premium per unit of payoff.

Understand Straddles, Strangles and Other Combinations

A combination is a position that holds both calls and puts on the same underlying with the same expiry. A spread uses only calls or only puts. A combination lets you bet on the size of a price move, not just its direction.

A long straddle buys one call and one put with the same strike K and expiry. You pay two premiums. You profit if the price ends far from K in either direction. You lose the most, the total premium, if the price ends exactly at K. Loss is limited. Profit is unlimited on the upside and large on the downside (limited only because the price cannot go below zero).

A long strangle buys an out-of-the-money put (strike K1) and an out-of-the-money call (strike K2), with K1 < K2. It costs less than a straddle. But the price must move further before you profit. The flat loss zone between K1 and K2 is wider.

A strip is one call and two puts at the same strike. It is a bet on volatility with a bias toward a fall. A strap is two calls and one put at the same strike. It is a bet on volatility with a bias toward a rise. All of these are long volatility positions. The opposite positions (short straddle, short strangle) earn the premium if the price stays quiet but can lose heavily on large moves.

Key formulas to remember

Long straddle payoff: Payoff = max(S_T − K, 0) + max(K − S_T, 0) = |S_T − K|; Profit = |S_T − K| − (c + p). Maximum loss = c + p, at S_T = K.
Straddle breakevens: K + (c + p) and K − (c + p); Two breakevens, symmetric around K.
Long strangle payoff: max(K1 − S_T, 0) + max(S_T − K2, 0), with K1 < K2; Payoff is zero for K1 ≤ S_T ≤ K2. Profit = payoff − (p + c).
Strangle breevens: K2 + (p + c) and K1 − (p + c); Premium p is for the put at K1, c for the call at K2.
Strip (1 call, 2 puts): Payoff = max(S_T − K, 0) + 2 × max(K − S_T, 0); Upside breakeven = K + (c + 2p). Downside breakeven = K − (c + 2p) ÷ 2.
Strap (2 calls, 1 put): Payoff = 2 × max(S_T − K, 0) + max(K − S_T, 0); Upside breakeven = K + (2c + p) ÷ 2. Downside breakeven = K − (2c + p).
Short positions: Short position profit = − (long position profit); Maximum gain is the premium received. Short straddle and strangle have very large potential losses.

How to solve Straddles, Strangles and Other Combinations questions

Use this routine for any question on straddles, strangles, strips or straps.

1Identify the position: long or short, and the number of calls and puts (1:1, 1:2 or 2:1).
2Write down the strikes. Same strike means straddle, strip or strap. Different strikes with put below call means strangle.
3Add up the total premium paid (or received), counting every option.
4Compute the payoff at the given final price S_T from each leg. Multiply by the number of options.
5Subtract total premium for profit. Reverse the sign for a short position.
6For breakevens, set profit to zero on each side. Divide by the number of options on that side.
7Check the answer: the maximum loss should equal the total premium at the strike, and the payoff should be zero inside the strangle band.

Quickest way: Premium-distance shortcut

When to use it: Use for breakeven and profit questions on a 1:1 straddle or strangle when the options are standard and you have little time.

Add the two premiums to get total cost C.
Straddle: breakevens are K ± C.
Strangle: upper breakeven is K2 + C. Lower breakeven is K1 − C.
For a strip or strap, divide the cost by the number of options on the side that pays double.
For profit at S_T, find how far S_T is beyond the nearest strike, then subtract C.

Common mistakes in Straddles, Strangles and Other Combinations

Using only one premium when finding breakevens.
Students think of the call and put as separate trades and forget both are paid for.
Fix: Always add both premiums. The breakeven distance from the strike (or band edge) is the total premium.
Putting the strangle strikes the wrong way round, with the call strike below the put strike.
Confusion with in-the-money versions, which are rare.
Fix: A standard strangle has K1 (put) < K2 (call). Both options are out of the money at the start.
Mixing up strip and strap.
The names sound alike.
Fix: Strap has two calls (think: up). Strip has two puts (think: down). Strap is bullish-biased and strip is bearish-biased.
Forgetting to divide by the multiple on the doubled side in strips and straps.
Students copy the straddle shortcut.
Fix: For a strip, downside profit is 2 × (K − S_T) − cost, so the downside breakeven is K − cost ÷ 2.
Saying a long straddle has unlimited loss.
Confusing long and short positions.
Fix: Long straddle and strangle loss is limited to the premium paid. The short versions have large or unlimited losses.
Choosing a straddle for an expected stable market.
Mistaking a volatility position for a directional one.
Fix: Long straddle or strangle is for expected large moves. A short straddle or strangle is for expected calm.

Worked examples

Example 1

A trader buys a straddle on a stock at strike $50. The call costs $4 and the put costs $3. Find the breakevens, and the profit if the stock ends at $62 and at $50.

Show the solution

Total premium = 4 + 3 = $7.
Upper breakeven = 50 + 7 = $57. Lower breakeven = 50 − 7 = $43.
At S_T = 62: call payoff = 62 − 50 = 12. Put payoff = 0. Profit = 12 − 7 = $5.
At S_T = 50: both options expire worthless. Profit = −$7.

Answer: Breakevens are $43 and $57. Profit is $5 at $62 and −$7 (the maximum loss) at $50.

Example 2

An investor buys a strangle: a put with strike $40 for $2 and a call with strike $60 for $3. Find the breakevens and the profit if the stock ends at $35. Then find the profit of a strap (two calls, one put) at strike $50 with call $4 and put $3 if the stock ends at $56.

Show the solution

Strangle cost = 2 + 3 = $5.
Strangle breakevens: upper = 60 + 5 = $65. Lower = 40 − 5 = $35.
At S_T = 35: put payoff = 40 − 35 = 5. Call payoff = 0. Profit = 5 − 5 = $0, which is the lower breakeven.
Strap cost = 2 × 4 + 3 = $11.
At S_T = 56: two calls pay 2 × (56 − 50) = 12. Put pays 0. Profit = 12 − 11 = $1.

Answer: Strangle breakevens are $35 and $65, and profit at $35 is $0. The strap profit at $56 is $1.

Exam tips

Draw a quick payoff sketch. A V shape means straddle, a flat-bottomed V means strangle, and a lopsided V means strip or strap.
Check whether the question asks for payoff or profit. Profit subtracts the premium.
Read the numbers of options carefully. A 1:2 or 2:1 ratio changes the breakeven on one side.
Expect conceptual questions: which view on volatility each position expresses, and who loses if the price stays flat.
Ignore discounting unless the question says to include the time value of the premium.

Practice questions from Trading Strategies

Straddles, Strangles and Other Combinations in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Straddles, Strangles and Other Combinations: frequently asked questions

What is the difference between a straddle and a strangle?

A straddle uses a call and a put at the same strike. A strangle uses an out-of-the-money put and an out-of-the-money call at different strikes. The strangle costs less but needs a bigger price move to profit.

What is the difference between a strip and a strap?

A strip is one call and two puts at the same strike, so it favors a price fall. A strap is two calls and one put at the same strike, so it favors a price rise. Both profit from large moves in either direction.

When should you use a strangle?

Use a long strangle when you expect a large price move but are unsure of the direction, and want a cheaper entry than a straddle. Events such as earnings or policy decisions are typical examples. You accept a wider zone where you lose the full premium.

How do you calculate straddle profit?

Find the absolute distance between the final price and the strike, then subtract the total premium paid for the call and put. A negative result is a loss, capped at the total premium.