Straddle
Quick Definition
An options strategy involving the simultaneous purchase (or sale) of a call and put at the same strike price and expiration, betting on volatility magnitude.
What Is Straddle?
A straddle involves buying (long straddle) or selling (short straddle) both a call and a put option at the same strike price and expiration date, typically at the money. A long straddle profits from a large move in either direction — the trader pays the combined premium and needs the stock to move far enough to overcome this cost. A short straddle collects the combined premium and profits when the stock stays near the strike, but faces theoretically unlimited risk on the upside and substantial risk on the downside. Long straddles are popular before binary events like earnings, FDA announcements, or elections where the direction is uncertain but a large move is expected. The breakeven points are the strike price plus and minus the total premium paid. Straddles are the purest expression of a volatility view — long straddles profit from realized volatility exceeding implied volatility.
Straddle Example
- 1Before earnings, buy the $100 call for $4 and $100 put for $4 (total cost $8). The stock must move above $108 or below $92 for the straddle to profit at expiration
- 2A market maker sells a short straddle on SPY at $450, collecting $12 in premium. The position profits if SPY stays between $438-$462 by expiration
Related Terms
Strangle
An options strategy involving the purchase (or sale) of an OTM call and OTM put at different strikes with the same expiration, a wider alternative to a straddle.
At the Money (ATM)
An option whose strike price is equal or very close to the current market price of the underlying asset.
Implied Volatility (IV)
The market's forecast of the likely magnitude of future price movements, derived from current option prices using pricing models.
Volatility Crush
A rapid decline in implied volatility, typically after a major anticipated event, causing option prices to drop sharply.
Iron Butterfly
A neutral options strategy that sells an ATM straddle and buys OTM wings for protection, creating a defined-risk position that profits from low volatility.
Call Option
A contract giving the holder the right, but not the obligation, to buy an underlying asset at a specified price within a specified time period.
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