Long Straddle: How It Works, Example and Risks
A long straddle buys a call and a put at the same strike and expiration. Traders use it when they expect a big move but don't know the direction. The main risk is price staying still while time decay and IV crush erode both legs.
At a glance
| Outlook | volatility |
|---|---|
| Level | intermediate |
| Max profit | Unlimited upside; large downside to zero |
| Max loss | Total premium × 100 |
| Breakeven | Strike ± total premium |
| Greeks exposure | Near-zero delta, high gamma, negative theta, positive vega |
| Ideal IV environment | Low IV before an expected expansion |
Payoff diagram
Worked example
Buy the $100 call and $100 put for $8.00 total ($800). Breakevens $92 and $108. At $120, profit is ($20 − $8) × 100 = $1,200.
How to manage it
- Avoid buying right before earnings when IV is inflated.
- Close if the move happens early.
- Set a time stop to limit decay.
Risks
- Lose the full premium if price pins the strike.
- IV crush after events.
- Fast theta decay.
Questions
When should I buy a straddle?
When you expect a move larger than the market's expected move.
Why do straddles lose after earnings?
Implied volatility often collapses after the report.
Straddle vs strangle?
Strangles use OTM strikes: cheaper but wider breakevens.
Related
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