A Straddle is a strategy that involves buying a call and a put at the same strike and expiry.
It’s a pure play on volatility: you profit if the underlying moves significantly in either direction.
How It Works
Buy 1 at-the-money call
Buy 1 at-the-money put
Both options share the same strike and the same expiration.
Profit and Loss Profile
Maximum Profit: Theoretically unlimited on the upside; substantial on the downside up to the asset’s price reaching zero. Profit rises as the underlying moves far from the strike.
Maximum Loss: Limited to the total premium paid for both options.
Breakeven: Two breakeven points — strike ± total premium paid.
Why Traders Use It
To trade expected volatility spikes (e.g., before major events).
When direction is uncertain but a big move is expected.
To get pure exposure to volatility without directional bias.