Long straddle
Buy a call and a put at the same strike and expiry. Pays off if the stock moves big either way. Loses if the stock stays flat — premium decay works against you.
How a long straddle works
A long straddle buys a call and a put at the same strike and expiry, usually at the money. You are not taking a direction — you are buying movement. The position profits if the stock moves far enough either way, and loses if it sits still.
Because you are paying for two options, the cost is high and the breakevens are wide. You need the move to exceed the combined premium before anything is made. That is the entire difficulty of the trade: the market prices options using implied volatility, which is its estimate of how much the stock will move, so a straddle is really a bet that the actual move exceeds the priced-in one.
The second risk is less obvious and catches people out constantly. Implied volatility usually rises into a known event and collapses immediately after it. A stock can move exactly as you predicted and the straddle can still lose, because both legs reprice downward when the uncertainty resolves.
A worked example
XYZ trades at $100 ahead of a catalyst. You buy the $100 call for $3.00 and the $100 put for $3.00, both expiring in 30 days.
The stock has to move 6% in either direction just to break even. A 4% move — large by most standards — still loses money here, which is why "I expect volatility" is not on its own a reason to buy a straddle.
When a long straddle fits — and when it doesn't
- You expect a move materially larger than the options are pricing, and can say why.
- Implied volatility is low relative to its own history, so you are not buying the expectation at a premium.
- The catalyst is real but its direction is genuinely unknowable.
- Immediately before earnings, when implied volatility is at its highest and the post-print crush is most severe.
- On a range-bound underlying. Sideways is the single worst outcome for the position.
- When the breakevens imply a move larger than the stock has historically made in the time you have.
Common questions
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