What is a straddle?
In one line: A straddle is a call and a put on the same stock, at the same strike and the same expiry. Bought together it pays for a big move either way; sold together it collects a premium for the stock sitting still.
How it works
A straddle is a Call option and a Put option on the same stock, at the same Strike price, expiring on the same date.
Buy both and you have a long straddle. You are not picking a direction, you are paying for size of move. Sell both and you have a short straddle: you keep the premium if the stock barely moves.
That one shared strike is what separates it from a Strangle, where the two legs sit at different strikes.
An example (hypothetical)
An illustration, not a trade idea. Made-up company Cobalt Mining trades at $100.
- Buy the $100 call for $4.00.
- Buy the $100 put for $4.00.
Total cost: $8.00, or $800 for one straddle.
Break-evens use the total premium, not one leg's: $100 + $8 = $108 up, and $100 − $8 = $92 down.
| Cobalt at expiry | Result per straddle |
|---|---|
| $120 | Call worth $20. +$1,200 |
| $108 | Break-even. $0 |
| $100 | Both expire. −$800 (max loss) |
| $92 | Break-even. $0 |
| $85 | Put worth $15. +$700 |
The worst case is the stock finishing exactly where it started. At $85 the result is the $7 past the $92 break-even, so $700.
Why it matters for sellers
A straddle is the cleanest way to see what a premium is actually saying. Here the market is charging $8 on a $100 stock, so it expects a move of roughly that size by expiry. That is the Expected move, and it is the bar the buyer has to clear.
Sellers use the same number in reverse. A short straddle collects the whole $800 and has a loss that grows in both directions from $100, which is why it needs a high broker options approval level and will usually be refused in a Canadian TFSA or RRSP. Most premium sellers who want that trade widen the strikes into a Strangle, or buy wings and turn it into an Iron condor. The full map is in option strategies beyond the wheel, and the patient version of the same idea is the wheel strategy.
A common mistake
Being right about the move and still losing. A buyer who pays $8 and watches the stock jump $5 after news was right about the direction and still lost $300. The move has to beat the total premium, not just happen.
It gets worse around an Earnings report, because Implied volatility is high going in and falls straight after. Both legs can lose value on the same day the stock moves your way.
Questions
What is the max loss on a long straddle?
The premium you paid, and you hit it when the stock finishes exactly at the strike. In the example that is $800.
How far does the stock have to move for a straddle to pay?
Past the total premium, in either direction. $100 strike plus $8 paid means above $108 or below $92 by expiry.
Is a straddle a good earnings trade?
It is the obvious one, which is why it is rarely cheap. Option prices already carry the expected move before the report, and they deflate after it. See implied volatility.
Can you sell a straddle instead?
Yes, and you keep the premium if the stock sits still. The loss then grows the further it travels either way, with no cap on the call side.
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