What Is Straddle?
A long straddle buys a call and a put at the same strike and expiration, typically at-the-money. The trade profits when the underlying moves significantly in either direction, beyond the combined premium paid.
Straddles are more expensive than strangles because both options are at-the-money (higher extrinsic value), but they require smaller moves to break even. Maximum loss equals the total premium paid. Profit potential is uncapped on the upside and substantial on the downside.
Used heavily around earnings releases and binary events. The challenge is the IV crush after the event — even if the underlying moves significantly, a 30% IV collapse can wipe out the directional gain. The best straddle setups happen when implied vol is unusually low going into a known catalyst.
Related terms
- Options Contract — A derivative giving the right (but not obligation) to buy or sell an asset at a set price by a set date.
- Strangle — Buying both an OTM call and an OTM put — bets on a large move in either direction.
- Vega — Sensitivity of an option's price to a 1-point change in implied volatility.
- Implied Volatility (IV) — Market-expected future volatility, derived from options prices.