A long straddle profits when a stock makes a big move — in either direction. You don't need to pick a side. You just need the stock to move enough to cover what you paid for both options.
You buy a call and a put at the same strike price and expiration. Both options cost premium. You pay for both — once for the right to profit from a rise, once for the right to profit from a fall. In exchange, you profit if the stock moves far enough in either direction to recover the combined cost.
If the stock surges, the call gains value while the put expires worthless. If the stock crashes, the put gains value while the call expires worthless. If the stock goes nowhere, both options decay and you lose the full premium paid — that's the risk.
Example: A stock is at $100. You buy the $100 call for $4.00 and the $100 put for $3.50. Total cost: $7.50 per share ($750 total). Your two breakevens: $107.50 on the upside ($100 + $7.50) and $92.50 on the downside ($100 − $7.50). The stock needs to move more than 7.5% in either direction for you to profit at expiration.
Maximum profit: Unlimited on the upside (stocks can rise indefinitely). On the downside, capped at strike minus premium paid, since stocks can only fall to zero. In the example: ($100 − $7.50) × 100 = $9,250 maximum on the downside.
Maximum loss: The total premium paid. In the example, $750. This occurs if the stock closes exactly at the strike price at expiration — both options expire worthless.
Breakeven points: Strike price plus total premium ($107.50) and strike price minus total premium ($92.50).
You expect a big move but don't know the direction. The classic setup is before earnings — you think the report will move the stock meaningfully, but you're not sure which way.
Implied volatility is low. When IV is low, options are cheap. Buying two options at low IV means your breakeven is closer to the current price and you need less of a move to profit.
A binary event is approaching. FDA decisions, merger announcements, court rulings — anything with a clear yes/no outcome and large potential impact on either side.
Right before earnings when IV is already elevated. Straddles bought right before earnings are often priced for a large move. The IV crush after the announcement frequently destroys value even when the stock moves significantly — you can be right about the direction and still lose.
You expect a slow grind. Time decay attacks both legs simultaneously. If the stock drifts sideways for two weeks, you lose money every day regardless of direction.
What's the difference between a straddle and a strangle?
A strangle uses out-of-the-money options — a call above the stock price and a put below it. This makes it cheaper than a straddle but requires a bigger move to profit. The straddle uses at-the-money options for both legs.
When should I close a straddle?
Many traders set a profit target of 25–50% of the premium paid and close when reached. If the big move happens quickly, close — don't wait for expiration to give back gains. If the stock is flat two-thirds of the way through the trade, cutting the loss early usually beats holding and watching both legs continue to decay.
Can I profit on a straddle without a big stock move?
Yes, if implied volatility expands significantly after you buy the position. The straddle gains value when the market re-prices expected movement higher — even before any actual stock movement. This is sometimes called a "vol trade" rather than a directional trade.