Long Straddle Options: Strategy, Risks, and Examples

Overview

A long straddle is an options strategy that profits from large moves in an underlying asset in either direction. It involves buying a call and a put with the same strike price and the same expiration date—typically at‑the‑money. The position benefits when price movement or implied volatility increases sufficiently to overcome the combined premiums paid.

How it works

• Buy one call and one put on the same underlying, same strike, same expiration.
• Calls gain value when the underlying rises; puts gain when it falls.
• Small price moves in either direction usually result in a net loss (premiums paid). Large moves produce profit regardless of direction.
• Traders commonly use straddles ahead of anticipated volatility events (earnings, regulatory decisions, elections, Fed actions).

When to use

• Expectation of a large price move but uncertain about direction.
• Anticipation of increased implied volatility before a known event.
• Not appropriate when you expect little movement; premiums may decay.

Risk and reward

• Maximum loss: the total net premium paid (plus commissions). This occurs if the underlying price equals the strike at expiration.
• Maximum gain:
• Upside: theoretically unlimited as the underlying price rises.
• Downside: limited — if the underlying falls to zero, the profit equals (strike price − net premium paid).
• Time decay (theta) and rising implied volatility (IV) are key influences:
• Time decay erodes option value as expiration approaches.
• Rising IV increases option premiums; falling IV reduces them.

Profit formulas

• If underlying price rises:
  Profit (up) = Underlying price − Strike price − Net premium paid
• If underlying price falls:
  Profit (down) = Strike price − Underlying price − Net premium paid

Breakeven points at expiration:
– Upper breakeven = Strike + Net premium paid
– Lower breakeven = Strike − Net premium paid

Example

• Underlying stock price: $50
• Buy a $50 call for $3 and a $50 put for $3 → Net premium = $6
• Breakevens: $56 (upper) and $44 (lower)
• Maximum loss: $6 (if stock finishes at $50)
• If stock finishes at $65:
  Profit = 65 − 50 − 6 = $9
• If stock falls to $0:
  Profit = 50 − 0 − 6 = $44

Implied volatility and timing

• Options premiums often rise before known events due to higher IV; sellers price this in.
• Two common approaches:
• Enter before the event to capture a move in IV and directional movement.
• Enter well before and close the position before the event to try to realize gains from rising IV alone.
• Risk: IV can fall after the event (volatility crush), reducing option prices even if the underlying moves.

Choosing an expiration

• Shorter expirations are cheaper but suffer faster time decay.
• Longer expirations cost more but provide more time for the anticipated move to occur.
• Choose based on expected timing of the catalyst and tolerance for premium cost and time decay.

Key term

• At‑the‑money (ATM): strike price equal (or very close) to the current market price of the underlying.

Summary

A long straddle is a volatility-focused, direction‑neutral strategy: buy a call and a put at the same strike and expiration to profit if the underlying moves sharply up or down. It offers unlimited upside on a rally and substantial—but capped—gain if the underlying falls to zero. The primary cost and risk come from the premiums paid and time decay; implied volatility dynamics around events are critical to timing and profitability.