Straddle

A straddle is an options strategy where you buy a call and a put on the same stock, with the same strike price and the same expiration. You are betting the stock will make a big move, but you are not betting on which direction.

Because you own both sides, a straddle profits if the stock moves far enough up or far enough down. It loses if the stock stays close to the strike.

A stock trades at $100. You buy the $100 call for $3.00 and the $100 put for $3.00, a total cost of $6.00 per share, or $600 per contract of 100 shares. That $6.00 is the most you can lose.

To profit at expiration, the stock needs to move past $106 or below $94, the break-even points (strike plus or minus the total premium paid). Between $94 and $106, the position loses money; the closer the stock lands to $100, the bigger the loss, up to the full $600. These are made-up numbers before commissions.

Buying two options means paying two premiums, so a straddle needs a genuinely large move to pay off. It loses value to time decay every day the stock sits still, since both legs are long options and theta works against you on both.

Rising implied volatility helps a straddle even before the stock moves, because it makes both options more expensive. Falling implied volatility hurts it the same way. This is why straddles are sensitive to vega, not just to the stock price.

Straddles are popular before earnings because a big move is expected. The problem is that implied volatility is usually already high going into the report, priced for that uncertainty, and it tends to collapse right after the announcement, win or lose. That collapse is called IV crush.

A stock can move the way you expected and the straddle can still lose money, because the drop in implied volatility outweighs the gain from the move. This is one of the more common surprises for traders new to straddles.