Straddle

A straddle combines a call and a put with the same strike and expiration. Buying both, a long straddle, profits if the underlying makes a large move in either direction. Selling both, a short straddle, profits if the underlying stays near the strike. Straddles are the purest options bet on volatility: direction does not matter, only the size of the move compared with what the market has priced in.

Long straddle#

The implied move#

The price of an at the money straddle is a quick estimate of the move the market expects by expiration:

implied move ≈ straddle price / stock price

In the example, $8 / $100 = 8%. A long straddle profits at expiry only if the actual move exceeds the implied move. Traders compare implied moves with past moves around similar events to judge whether straddles are cheap or expensive. See Earnings Trading and Implied Volatility (IV).

Short straddle#

Short straddles collect large premiums but carry large, uncapped risk. Most traders who want this exposure use an iron butterfly, which adds protective wings. See Iron Butterfly.

Volatility crush#

Straddles bought before events often lose money even when the stock moves, because implied volatility falls after the news. If the move is smaller than the implied move, both the price change and the volatility drop work against the long straddle. See Volatility Crush and Expansion.

Managing straddles#

Long straddles

• Close early if a big move happens; there is no reason to wait for expiry.
• Gamma scalp: delta hedge as the price swings to lock in gains. See Gamma Scalping.
• Exit before decay accelerates if the move has not come.

Short straddles

• Take profits at a fraction of the credit.
• Hedge delta as price moves away from the strike.
• Set strict loss limits.

Straddle vs strangle#

A strangle uses an out of the money call and put instead of at the money options. It is cheaper but needs a bigger move. See Strangle.

Common mistakes#

• Buying straddles when implied volatility is already very high.
• Holding long straddles to expiry, letting time value decay.
• Selling naked straddles with too much size.
• Ignoring the implied move when judging value.

Frequently asked questions#

What is a straddle in options?#

Buying or selling a call and a put with the same strike and expiration. A long straddle profits from big moves; a short straddle profits from small ones.

How do you calculate straddle break evens?#

Add and subtract the total premium from the strike. For a $100 straddle costing $8, the break evens are $92 and $108.

Why do straddles lose money after earnings?#

Because implied volatility falls after the announcement. If the move is smaller than the implied move, the straddle loses value despite the price change.

Next, learn the cheaper cousin, the Strangle.