Long straddle
Also known as: buying a straddle
A long straddle is an options strategy in which you buy a call and a put on the same underlying security with the same strike price and expiration. It profits when the security makes a large move in either direction.
A long straddle is created by buying a call and buying a put on the same underlying security, with the same strike price and the same expiration date. Because both legs are purchases, the position is established for a net debit — the combined premiums paid.
The strategy is a bet on volatility rather than direction. If the stock rises sharply, the call becomes valuable and the put expires worthless. If it falls sharply, the put pays off and the call expires worthless. Either outcome can be profitable, but the move has to be large enough to cover both premiums. If you buy an XYZ 50 call for $3 and an XYZ 50 put for $2, your total cost is $5 per share, so the position breaks even at 55 on the upside and 45 on the downside. Maximum loss is the $500 total premium, which occurs if the stock closes exactly at 50.
The mirror image is the short straddle, where you sell both the call and the put for a net credit and profit if the stock stays near the strike. A long straddle has limited, defined risk and theoretically unlimited upside potential; a short straddle has limited profit and unlimited risk. When the strike prices or expirations of the two legs differ, the position is a combination rather than a straddle.
Straddles show up throughout the options sections of the Series 7, Series 9, and Series 66 exams. Expect to calculate breakeven points (strike plus total premium and strike minus total premium), identify maximum gain and maximum loss, and match an investor's outlook — "expects volatility but is unsure of direction" — to the long straddle.
Key takeaways
- A long straddle is a long call plus a long put at the same strike and expiration.
- It profits from a large price move in either direction, not from a specific direction.
- Breakevens are the strike plus total premium and the strike minus total premium.
- Maximum loss is the total premium paid, which occurs if the stock closes at the strike.
- Differing strikes or expirations make the position a combination instead of a straddle.