A straddle is an options strategy that profits from big moves in either direction. It involves buying (or selling) both a call and a put at the same strike price. Here is how it works.
What is a Straddle?
A straddle consists of buying or selling a call and a put with the same strike price and the same expiration date. The strike is typically at-the-money (ATM), meaning it is close to the current stock price.
Simple version: A straddle is a bet on movement. You do not care which direction the stock goes, just that it moves. Long straddles profit from big moves. Short straddles profit when the stock stays put.
Long Straddle
You buy both an ATM call and an ATM put. You profit if the stock makes a big move in either direction.
Long Straddle Example
Stock is at $100.
- Buy $100 call for $3.00
- Buy $100 put for $3.00
- Total cost: $6.00 ($600 per contract)
Breakeven points: $94 or $106
Max loss: $6.00 if stock stays exactly at $100
Max profit: Unlimited if stock moves big in either direction
When to Use a Long Straddle
- Before earnings when you expect a big move
- Before FDA announcements or major news
- When IV is low relative to expected movement
- When you have no directional bias but expect volatility
Short Straddle
You sell both an ATM call and an ATM put. You profit if the stock stays near the strike price and the options expire worthless.
Short Straddle Example
Stock is at $100.
- Sell $100 call for $3.00
- Sell $100 put for $3.00
- Total credit: $6.00 ($600 per contract)
Breakeven points: $94 or $106
Max profit: $6.00 if stock stays exactly at $100
Max loss: Unlimited if stock moves big in either direction
When to Use a Short Straddle
- When you expect the stock to stay flat
- When IV is high and you expect IV crush
- After a stock has made a big move and you expect consolidation
Straddle vs Strangle
- Straddle: Same strike for call and put (ATM). More expensive but profits from smaller moves.
- Strangle: Different strikes (OTM call and OTM put). Cheaper but needs a bigger move to profit.
Risks
Long Straddle Risks
- Both options can expire worthless if stock does not move enough
- Time decay works against you on both legs
- IV crush can hurt you even if the stock moves
- Expensive because you are buying two ATM options
Short Straddle Risks
- Unlimited loss potential on either side
- Requires significant margin
- Sudden moves or gaps can cause large losses
- Needs active management
Tips for Trading Straddles
- Compare expected move vs. straddle cost before earnings
- For long straddles, buy when IV is low
- For short straddles, sell when IV is high
- Manage losers early - do not let losses grow
Track Your Straddle Trades
Pro Trader Dashboard tracks all your options strategies. See how your straddles perform over time.
Summary
A straddle is a volatility strategy using the same strike for both call and put. Long straddles profit from big moves in either direction. Short straddles profit when the stock stays put. Straddles are more expensive than strangles but need smaller moves to profit.
Learn about related strategies: strangles or iron butterflies.