A straddle holds a call and a put at the same strike and expiration. Bought, it profits when the stock moves further in either direction than the combined premium paid; its price is the market's clearest quote of the expected move.
A straddle buys (or sells) a call and a put at the same strike, usually at the money, on the same expiration. A long straddle has no directional view: it needs the stock to move, in either direction, by more than the two premiums cost.
A $100 stock with 30 days to expiration and a flat 30% implied volatility (model prices). A long straddle buys the 100 call for $3.59 and the 100 put for $3.26.
| Stock at expiration | Worth at expiration | Profit or loss per contract |
|---|---|---|
| $85 | Put worth $15 | +$815 |
| $93.15 | Put worth $6.85 | $0 |
| $100 | Both expire worthless | -$685 |
| $106.85 | Call worth $6.85 | $0 |
| $115 | Call worth $15 | +$815 |
Under the same model, the stock finishes outside the breakevens about 43 percent of the time.
Selling the same straddle collects the $685 and keeps it all only if the stock finishes at 100. The risk is unlimited on the upside and large on the downside. Adding a bought put below and a bought call above caps it, which turns the position into an iron butterfly, the defined-risk version.
The at-the-money straddle is the market's price for a move in either direction. Under the model it is about 0.8 of one standard deviation: the $6.85 straddle against an $8.60 one-standard-deviation expected move in the example. That is why event analysis reads the implied move straight from it.
Before earnings, implied volatility rises to price the event, and straddles get expensive. After the report it collapses, the IV crush, and a long straddle can lose money even on a sizeable move if the move is smaller than the one priced in. Published research places the long straddle's documented edge in the final three to five trading days before the report, a pattern covered in earnings and implied moves. A strangle is the cheaper, wider version of the same bet.
Add the total premium to the strike for the upper breakeven and subtract it for the lower one. A 100 straddle bought for $6.85 breaks even at $106.85 and $93.15 at expiration.
Implied volatility rises before the report and collapses after it. If the stock moves less than the straddle priced in, the drop in volatility outweighs the gain from the move.
A straddle uses one strike for both the call and the put, usually at the money; a strangle uses an out-of-the-money call and put. The strangle costs less and needs a larger move to profit.