Long Straddle

Overview

The Long Straddle is a strategy for traders who expect a stock to "explode" in either direction. By buying both a call and a put at the exact same strike price and expiration, you create a payoff profile that looks like a giant 'V'.

You don't care if the stock goes up or down. You only care that it moves fast and moves far.

[!WARNING] Straddles are notoriously difficult to trade. Because you are buying twice as much "extrinsic value" as a normal trade, the "ticking clock" of time decay is twice as loud.

The Setup

A Long Straddle consists of:

1. Long Call: Buy 1 call at Strike $K$.
2. Long Put: Buy 1 put at the same Strike $K$.

Mechanics of the "V"

• At the Strike: If the stock ends exactly at the strike price, you lose 100% of the premium you paid. This is your "Point of Maximum Pain."
• Moving Away: As the stock moves in either direction, one of your options starts gaining value while the other loses. Once the gain on the winning side exceeds the cost of both premiums, you are in the green.

Payoff and Break-even

Max Profit

Theoretical infinity to the upside, and nearly 100% to the downside (as stock hits zero).

$$\text{Max Profit} = \text{Unlimited}$$

Max Loss

The total amount paid for both options.

$$\text{Max Loss} = \text{Call Premium} + \text{Put Premium}$$

Break-even Points

You have two break-even boundaries:

• Upper BE: $\text{Strike} + \text{Total Premium}$
• Lower BE: $\text{Strike} - \text{Total Premium}$

The "Volatility" Greeks

Straddles are the purest way to play the Greeks.

1. Delta: Perfectly Neutral

An at-the-money (ATM) Call has a Delta of +0.50. An ATM Put has a Delta of -0.50. Together, they equal 0.00. This makes the trade direction-neutral at entry.

2. Gamma: Maximum "Pop"

Straddles have very high Positive Gamma. As the stock starts moving, your Delta rapidly shifts in favor of the direction of the move. If the stock rallies, your Delta becomes +0.10, then +0.30, then +0.80.

3. Vega: The "Fear" Factor

You are heavily "Long Vega." If the market becomes more uncertain (IV goes up), the value of your straddle will skyrocket, even if the price stays still. This is common before a major event.

4. Theta: The Great Destroyer

Because you are long two options, you are losing "rent" on both every single day. If the stock stays pinned to the strike, the Straddle will bleed value faster than almost any other strategy. This is known as Theta decay.

When to Use?

• Expected Volatility Spike: You think a big news event (FDA approval, Earnings, Merger) will cause a massive price swing.
• Cheap Volatility: You believe the market is "underpricing" the potential move.

Checklist for Entry

• Is the total cost less than what I expect the stock to move?
• Have I accounted for the IV Crush? (Volatility often drops 50%+ immediately after earnings).
• Is there enough time (DTE) left for the move to actually happen?

Straddle Price as 'Expected Move'Read more

Traders often use the price of at-the-money straddles to calculate the "Expected Move" ($EM$) for a specific date:

$$EM \approx 0.85 \times (\text{Straddle Price})$$

If the stock moves more than the straddle price, it is said to have "outperformed the market's expectation." As a straddle buyer, you are betting on this outperformance.