What is a Long Straddle? (Betting on Volatility)
The long straddle is the "I don't know where it's going, but it's going somewhere fast" trade.
Quick Summary
A Long Straddle is when you buy both a call option and a put option on the same stock, with the same strike price and expiration date. You profit if the stock makes a large move in either direction.
In most trading strategies, you have to pick a side. You're either a Bull (betting up) or a Bear (betting down). If you pick the wrong side, you lose money.
But what if you didn't have to choose?
The Directional Dilemma
Most strategies force you to pick a side
Bull
Betting stock goes UP
Bear
Betting stock goes DOWN
Long Straddle
Betting stock moves BIG (either way)
What if there was a strategy that profited whether the market crashed or skyrocketed—as long as it didn't stay still? This strategy exists, and it's called the Long Straddle.
The Definition: What is a Long Straddle?
THE STRATEGY
Buy 1 Call + Buy 1 Put = Same Strike, Same Expiration
The Call
Makes money if the stock goes up. Gives you the right to buy at the strike price.
The Put
Makes money if the stock goes down. Gives you the right to sell at the strike price.
The "V-Shaped" Payoff Profile
By holding both, you create a profit zone on each side
You don't care about direction—you only care about magnitude. The bigger the move, the bigger your profit.
How It Works: A Real-World Example
To execute a straddle, you typically choose the At-The-Money (ATM) strike price—where the stock is currently trading.
Stock Price
$400
Strike Price
$400 (ATM)
Call Premium
$10.00 ($1,000)
Put Premium
$10.00 ($1,000)
Total Cost (Debit)
$20.00 per share = $2,000 total
The Break-Even Points
Because you paid two premiums (one for the call, one for the put), the stock must move significantly just to break even.
Your Two Break-Even Points
Lower B/E
$380
Strike
$400
Upper B/E
$420
Upper B/E = Strike + Premium ($400 + $20) | Lower B/E = Strike − Premium ($400 − $20)
The Two Possible Outcomes
At expiration: Netflix announces earnings and shoots up to $450
Your Put expires worthless → Loss of $10 ($1,000)
Your Call is worth $50 → Profit of $40 after cost ($4,000)
Net Result: +$3,000 profit. The call's gain far exceeded the put's loss.
At expiration: Netflix announces earnings, but the news is boring. Stock stays at $400.
Your Call expires worthless → Loss of $10 ($1,000)
Your Put expires worthless → Loss of $10 ($1,000)
Net Result: −$2,000 (entire investment lost). This is the maximum loss.
When to Use a Long Straddle?
The Straddle is a pure volatility play. You use it when you expect a "binary event"—something that will forcefully move the stock price.
Ideal Scenarios for Straddles
Earnings Reports
Companies like Tesla or NVIDIA often swing 10%+ after reporting numbers.
FDA Approvals
Biotech stocks can double or crash to zero on a single drug trial result.
Economic Data
CPI reports or Fed interest rate decisions can shock the entire market.
The Trap: The "IV Crush"
If the Straddle sounds too good to be true (profiting from both sides), here's the catch.
When everyone knows a big event is coming (like earnings), options become incredibly expensive because Implied Volatility (IV) spikes.
You pay an inflated price for the Straddle because of high IV
After the event, IV drops sharply ("Volatility Crush")
Both options lose value as the "premium air" (Vega) comes out
Warning: It's entirely possible to buy a Straddle, see the stock move in the correct direction, and still lose money because the drop in volatility hurt you more than the price move helped.
Frequently Asked Questions
Summary
The Long Straddle is not for everyday trading. It's a specialized tool for hunting price explosions.
Pros vs. Cons
Pros
- Unlimited profit potential in either direction
- No need to predict the trend—only magnitude
- Maximum loss is known upfront
Cons
- Expensive to enter (paying two premiums)
- Requires a larger-than-average move to profit
- IV Crush can erase gains after events
If you believe the market is asleep and about to wake up violently, the Long Straddle is your weapon of choice. Just make sure the move is big enough to overcome the cost of admission.
Continue Learning Options Strategies
- What is a Covered Call? Generating Income from Stocks
- What is a Cash-Secured Put? Getting Paid to Buy Stocks
- What is a Call Option? Understanding Bullish Bets
- What is a Put Option? Understanding Bearish Bets
- What is Implied Volatility? The Price of Uncertainty
- What is Vega? Sensitivity to Volatility Changes
