Straddle
A straddle is an options strategy that involves buying (or selling) both a call and a put at the same strike price and expiration date on the same underlying stock, profiting from large price moves in either direction (long) or from sideways movement (short).
The long straddle is the quintessential volatility trade. By purchasing both an ATM call and an ATM put with identical strike prices and expiration dates, the buyer profits if the stock makes a sufficiently large move in either direction. The direction of the move is irrelevant — what matters is magnitude. If the stock is at $100 and you buy the $100 call and $100 put each for $4.00, you pay $800 total. You profit if the stock is above $108 or below $92 at expiration (the strike plus or minus the combined premium).
Long straddles are commonly placed ahead of binary events — earnings announcements, FDA drug rulings, central bank decisions, or geopolitical developments — where a large move is anticipated but the direction is unknown. The risk is that the stock moves less than the combined premium paid, or barely moves at all, leaving the buyer with two options that both decay via theta. This 'theta burn' is the primary cost of the long straddle strategy.
The short straddle takes the opposite position: selling both the ATM call and put, collecting the combined premium and profiting if the stock stays near the strike price. Short straddles are high-risk positions — the maximum loss is theoretically unlimited on the call side and substantial on the put side — but they are profitable in low-volatility, range-bound markets. They are typically used only by experienced traders with robust risk management frameworks, often converted into iron condors by adding protective wings.
Straddles are also used to trade the 'volatility crush' following earnings. Because implied volatility spikes before an earnings announcement and collapses immediately after, short straddle traders positioned before the announcement collect inflated premiums. If the stock's actual move is smaller than the IV-implied expected move, both legs decay and the net credit is retained. Many traders back-test this approach by measuring the historical ratio of actual moves to IV-implied expected moves.
The breakeven analysis of a straddle is straightforward and useful for calibrating position sizing: the implied expected move equals the combined ATM straddle price, providing a quick read on how much the market expects the stock to move.