Options straddle

A straddle is an options strategy built by buying, or selling, a call and a put on the same underlying stock with the same strike price and the same expiration date. Rather than betting on the stock going up or down, a straddle is a bet on how much the stock is going to move, in either direction, over the life of the options.

A long straddle, buying both the call and the put, profits if the stock makes a large move away from the strike price before expiration, in either direction, since one leg of the trade will gain enough to more than cover the loss on the other and the combined premium paid. The maximum loss on a long straddle is limited to the total premium paid for both options, which happens if the stock sits close to the strike price at expiration and both options expire worthless or nearly so. Traders use long straddles around events with uncertain outcomes but a high likelihood of a big move, such as earnings reports or major regulatory decisions, when they have a view on volatility but not on direction.

A short straddle, selling both the call and the put, does the opposite, it profits if the stock stays close to the strike price and both options expire worthless or lose most of their value, letting the seller keep the combined premium collected upfront. The risk on a short straddle is large and, on the call side, theoretically unlimited, since a big move in either direction can produce losses on the losing leg that far exceed the premium collected, which is why selling a straddle is generally reserved for more experienced traders with a strong view that a stock will stay range bound.