When it comes to understanding Options on the Series 7, deciphering Straddles vs Spreads is a common point of confusion. In today’s post, we try to untangle that confusion. We also offer a few tips and tricks on how to remember the difference.
Straddles vs Spreads: Identify the Strategy
For starters, coming across any Options question on the Series 7, you need to identify the strategy.
The three most common Options strategies include:
- Spreads (call, call or put, put)
- Straddles (call, put)
- Hedging (1 stock, 1 option)
You should also know that all of the above strategies wager in opposite directions. In other words, for a spread an investor buys a call (bets up on the stock), and sells a call (bets down on the stock). Almost always FINRA will not want you to “double down” and bet two positions in the same direction (up or down).
To clarify the above, in order to identify a Spreads option strategy, it would need to include:
1 long call and 1 short call
or
1 long put and 1 short put
In other words, it could NEVER be long a call and long another call, or short a put and short another put.
Straddles
When it comes to a straddle, the strategy needs to include:
1 long call and 1 long put (long straddle)
or
1 short call and 1 short put (short straddle)
A key difference in straddles is also that the expiration month and the strike prices must be identical for the call and the put.
Add or Subtract?
Now let’s talk about the premiums. You may, or may not already realize that the premiums are simply the market prices of the options. As a result, these are never fixed in nature. They fluctuate second by second, or minute by minute, depending on how much the option trades.
That said, when it comes to straddles and spreads, many people get the premiums confused. Some forget whether you should add or subtract the premiums from each other.
A simple memory trick is that the word “add” is buried in the word strADDle. In other words, when it comes to straddles, you add the premiums together. For spreads you subtract them.
Well, we will leave it there for now. For the Series 7 Exam 2025, expect to see these options strategies. If you need some help with Series 7 options, feel free to reach out to one of our Series 7 tutors. Good luck, studying!