Long Straddle

1. Definition

A Long Straddle is a neutral strategy where an investor simultaneously buys both a Call option and a Put option with the same strike price and expiration date. It is a bet on volatility rather than direction.

2. Market View

• High Volatility: Used when a significant price movement is expected (e.g., earnings surprise, economic data release), but the direction of the move is uncertain. The strategy fails if the market remains stagnant.

3. Setup

• Action: Buy 1 ATM Call + Buy 1 ATM Put.
• Cost: High Net Debit (Paying double premiums).

4. Profit & Loss

4.1. Max Profit

Unlimited Significant gains can be made regardless of whether the market rallies or crashes. One option will expire worthless, but the other will profit substantially if the move is large enough.

4.2. Max Loss

Limited Occurs if the stock price finishes exactly at the strike price on expiration day. The maximum loss is capped at the total premiums paid to enter the trade.

5. Characteristics

Because you are paying two premiums, the break-even points are wide. The stock price needs to make a substantial move in either direction to cover the cost of the trade.