Strategies
Straddle
Also called: long straddle, short straddle
A straddle buys (or sells) a call and a put at the same strike and expiration, usually at the money. A long straddle profits from a large move in either direction; a short straddle profits if the underlying stays near the strike.
The straddle price is the market's cleanest statement of the expected move: the underlying must move more than the combined premium by expiration for a long straddle to profit. About 85% of the at-the-money straddle price approximates the one-standard-deviation move.
Long straddles are long vega and gamma and pay heavy theta; they are typically used into events where the trader expects a bigger move than priced. Short straddles collect the most premium of any two-leg structure but carry unlimited risk on both sides, so they are usually managed early or replaced with defined-risk iron butterflies.
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Frequently asked questions
When does a long straddle make money?
When the underlying finishes beyond either break-even (strike ± total premium) at expiration, or when IV rises enough before expiration to lift both legs.