Long Straddle: how the position works

Buy a call and a put at the same strike and expiry. The position is delta-neutral at inception and profits from a large move in either direction, which makes it the cleanest expression of "something is going to happen and I do not know which way". It is also the most expensive, because you are paying full time value twice and only one of the two legs can ever finish in the money.

Market view: Volatility — direction-agnostic
Opened for: Debit
Maximum profit: Unlimited to the upside; bounded below by K − total debit if the underlying goes to zero.
Maximum loss: The total debit, realised only if the underlying finishes exactly at the strike. It is the single worst outcome and it is also the most likely single point.
Breakeven: Two of them: K + total debit and K − total debit, at expiry.

How it is built

Buy 1 call at strike K
Buy 1 put at the same strike K, same expiry

All figures above are quoted per share and settle at expiry. A standard equity option covers 100 shares, so multiply by 100 for a single contract.

Before expiry: the Greeks

Delta near zero at the money, and it is the gamma that carries the position — the delta turns positive as the underlying rises and negative as it falls, so the position gets longer into strength and shorter into weakness on its own. Strongly long vega. Strongly short theta, and the decay is the worst on the board because two at-the-money options are decaying at once, which is why a straddle held through a quiet week is expensive even with the strike unchanged.

When to use it

Before a scheduled event whose outcome is binary but whose direction is genuinely unknown, or when realised volatility looks likely to exceed what implied volatility is charging. The second framing is the more durable one: a straddle is a bet that the market has underpriced movement, not merely that movement will occur.

What goes wrong

Implied volatility crush is the standard way this loses. Buying a straddle into earnings means paying an event premium that disappears the moment the result is out, so the underlying can gap hard and the position still lose.
The move must exceed the combined premium, which is roughly twice the at-the-money price. That is a much larger threshold than people estimate before pricing it.
Double decay. Two at-the-money options bleed together, and the loss is fastest in the final weeks.

A worked example

TSLA at 340. Buy the 340 call at 18.50 and the 340 put at 16.20, 35 days out.

Total debit paid: $34.70 per share — $3,470 for one contract pair
Upper breakeven: $374.70 (340 + 34.70)
Lower breakeven: $305.30 (340 − 34.70)
Maximum loss: $3,470, if TSLA finishes exactly at 340
Profit if TSLA finishes at 420: $4,530 ((420 − 340 − 34.70) × 100)

Commissions, exchange fees, financing and the bid/ask spread are excluded. On a multi-leg position the spread is usually the largest of these. Note how wide the breakevens are: TSLA must move about 10% either way just to return the premium.

Common questions

Why did my straddle lose money after a big earnings move?

Because the move was smaller than the one implied volatility had priced in. The straddle's cost embeds the market's expected move; beating the direction is not enough, you have to beat the size the market already charged you for.

Is a strangle better?

It is cheaper and needs a larger move. A strangle uses out-of-the-money strikes, so it costs less and has wider breakevens. Price both on the same expiry here and compare the breakevens against the move you expect.

Related strategies

Educational only. This page explains how a structure behaves; it is not a recommendation to trade it. Options and futures carry substantial risk, and short and leveraged positions can lose more than the amount originally invested.