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What Is an Options Straddle? Definition, Examples & Strategies

A long straddle is an options strategy that involves buying at-the-money puts and calls for the same security with the same expiration date in hopes of profiting off of expected price volatility in the underlying security.
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Straddle trades allow investors to speculate about a security's upcoming price volatility without predicting which direction its price will swing. 

What Is a Straddle in Options Trading?

In options trading, a straddle is a strategy that allows an investor to bet on the price movement (volatility) of a security without predicting the price movement’s direction. 

In other words, if an investor thinks a security will experience volatility (perhaps due to some upcoming event like an earnings call), they can enter a straddle position in order to profit from the security’s price movement regardless of direction.

How Do Straddles Work?

To make a straddle trade, an investor would buy a put and a call option for a particular security, each with the same strike price (usually at-the-money) and expiration date. They do this because they expect the price of the underlying security to change before the contracts expire, but they are not sure whether it will change in a positive or negative direction.

If the price of the underlying security does change significantly, one contract will lose value as it moves out of the money, while the other will gain value as it moves into the money. Remember, the only cost to the investor here is the premium paid for the contracts, so their downside is limited to that cost.

If the security changes in price significantly enough, the investor can then resell (or exercise) the in-the-money option contract for a profit, assuming the price of the underlying security changed enough to make the in-the-money option’s value rise by more than the premium the investor originally paid for both contracts.

Essentially, a straddle trader bets that an underlying security will change in price significantly enough to render either an at-the-money put or an at-the-money call more valuable at the time of expiry than the premiums for both contracts put together.

Long Straddles vs. Short Straddles

There are two types of straddle trades—long straddles and short straddles. The type of trade described in the section above is a long straddle, which is more common.

Long Straddles

As described above, long straddles involve purchasing both a put and a call with the same strike price and expiry with the hope of selling or exercising one for a profit once the price of the underlying security moves far enough in one direction or the other. 

With this type of straddle, an investor’s risk (how much they stand to lose) is limited to the premium they pay for the put and call contracts. Their potential return, however, is theoretically unlimited, as the farther the underlying security’s price moves away from the strike price, the more they stand to make upon the resale (or exercising) of the in-the-money contract.

Short Straddles

Short straddles are less common than long straddles and are typically only attempted by seasoned traders, as they carry far more risk and have a capped potential return. To make a short straddle trade, an investor would write (sell) a put and a call option for the same security with the same strike price and expiration date. This means speculating that the underlying security will not change significantly in price before the contracts’ expiration.

If the investor is right, the contracts are unlikely to be exercised, and the premium charged for the contracts can be pocketed as profit. It's important to note here that the premium charged is the maximum possible profit for the option seller of a short straddle. 

If, however, the price of the underlying security does change significantly, one of the options is likely to be exercised, and the option seller will be obligated to fulfill the contract. In doing so, their potential loss is not capped—it will be larger the further the underlying security’s price has moved from the strike price of the contract.

How and When Do Investors Make Money off of Straddles?

Long Straddle: In the case of a long straddle, an investor makes money if the value of one of the two options contracts they purchased exceeds the premium they initially paid for both of the options contracts due to price movement in the underlying security. The further away from the strike price the underlying security’s price moves, the more money a straddle holder can make.

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TheStreet Dictionary Terms

Short Straddle: In the case of a short straddle, an investor makes money if the options they wrote (sold) expire worthless because they are either still at the money or one is out of the money and one is so little in the money that exercising it would be pointless. When this occurs, the seller’s profit is the premium they charged the buyer for the contracts.

Straddle Example: Acme Adhesives

Let’s say a fictional company called Acme Adhesives is currently trading for $50 per share. In two weeks, the company has an earnings call, and analysts expect the news shared in this call to make or break the company’s stock price.

Since it’s unclear whether Acme’s earnings will impress or disappoint the market, an investor could open a long straddle with the hope of profiting whether Acme’s stock price moves up or down. Since the earnings call is in two weeks, the investor could buy a put contract and a call contract, each with a $50 strike price (equal to Acme’s current stock price) and each with an expiration date three weeks in the future.

If the premium for the put contract is $2/share, and the premium for the call contract is $2.50/share, the investor would spend $450 to buy the straddle ($2 * 100 shares for the put contract and $2.50 * 100 shares for the call contract).

If the earnings call goes well and the stock’s price rises to $56.25, each call option might now have a value of $6.75, giving the call contract a total value of $675 ($6.75 * 100 options). The put contract has now lost most of its value, but the investor can now resell the call options contract for its new value of $675 and end up with a profit of $225 (the $675 they sold the call contract for minus the $450 they initially paid for both the put and call contracts).

How Much Can You Lose on a Straddle?

In the case of a long straddle, an investor’s potential losses are limited to the premiums they pay for the put and call contracts. In the case of a short straddle, on the other hand, an investor’s potential losses are not capped and could be quite high if the price of the underlying security moves far enough away from the strike price of the contracts.

How to Place a Straddle Trade

Like any trade, a straddle play is speculative by nature and is not guaranteed to be successful. Intelligent investors should never spend more than they are willing to lose and should diversify their portfolios to the degree that they wish to mitigate risk.

That being said, an investor hoping to profit from a straddle might begin by researching the market and identifying a few stocks that have histories of price volatility following certain announcements, news, or events. Next, they could watch these stocks as similar events approach, and, if appropriate, buy at-the-money puts and calls with identical expiry dates during the weeks or days leading up to one of these events.

If, after the event, significant price volatility does occur, an investor could resell whichever contract has become more valuable—hopefully for more than they paid for both contracts originally—and pocket the profit. Options contracts can be traded on most popular trading platforms (Fidelity, Charles Schwabb, etc.) after approval.

How to Calculate When an Options Straddle Will Be Profitable

To determine how much price change would be necessary for a straddle to be profitable, investors can divide the total premium they would pay (for both put and call contracts) by the strike price the contracts share.

Using the fictional “Acme Adhesives” scenario outlined above, with a strike price of $50 and a total premium of $4.50, the price of the stock would need to rise or fall by more than 9% before expiry in order for an investor to profit from a straddle because 4.5 / 50 = 0.09.

Darkened photo of stock tickers with text overlay of the formula for breakeven percentage price change for straddles: "Price Change Percentage = (Put Premium + Call Premium) / Strike Price"

Breakeven Percentage Price Change = (Put Premium + Call Premium) / Strike Price

Breakeven Percentage Price Change for Straddle = (Put Premium + Call Premium) / Strike Price

What Is a Strangle?

A strangle is very similar to a straddle in that it involves buying a call and a put for the same security with the same expiration date. It differs from a straddle, however, in that rather than buying two contracts with the same (at-the-money) strike price, an investor buys contracts with two different (out-of-the-money) strike prices.

In other words, to initiate a strangle, an investor would buy a put with a strike price lower than the underlying security’s spot price and a call with a strike price higher than the underlying security’s spot price. This would be cheaper than buying a straddle, as at-the-money contracts have more intrinsic value than out-of-the-money contracts and therefore have higher premiums. This would also be riskier, however, as the price of the underlying asset would have to move more significantly to bring one of the contracts far enough into the money that it would be worth more than both premiums.

Note: The scenario above describes a long strangle. As with straddles, short strangles also exist, although they are less common, and they work in the opposite direction. To create a short strangle, an investor would write (sell) out of the money calls and puts for a particular security rather than buying them and hope for low volatility so they could pocket the premiums. 

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