Something big is about to happen to a stock — an earnings report, a product launch, a regulatory decision. You don't know if the news will be good or bad. But you're pretty confident the stock is going to move. A long straddle lets you bet on that movement without having to pick a direction.
Here's how it works.
What is a long straddle?
A long straddle combines two options on the same stock:
Buy a call option
Buy a put option
Both use the same strike price and the same expiry date. The call profits if the stock rises. The put profits if it falls. Together, they give you exposure to a big move in either direction.
Because it uses two options contracts, this is a multi-leg strategy. You pay a premium for both legs upfront — and that total cost is the most you can lose.
Legs of the trade: 2 (long call + long put) Strike price: Same for both legs Sentiment: Expecting increased volatility (direction doesn't matter)
When does a long straddle make sense?
Straddles tend to shine around events that could meaningfully move a stock — earnings announcements, product launches, regulatory decisions, legal outcomes. The logic is simple: if you think the market is underestimating how much the stock could move, buying a straddle before that event gives you exposure to the swing, whichever way it goes.
One thing to keep in mind: the market is always watching too. If an event is widely expected to be a big deal, options prices will rise ahead of it as traders price in the potential for movement — this is called an increase in implied volatility. A more expensive straddle means your break-even points are further from the strike price, so you need an even bigger move to profit. If the event ends up being a non-event, implied volatility drops and the straddle loses value quickly — even if the stock barely moved.
In short: timing matters. The closer you are to the event, the more expensive the straddle tends to be.
A real example (with fake numbers)
Let's say Marcus is watching PEAR stock ahead of a major announcement. He thinks PEAR is going to make a big move — he just doesn't know which way. PEAR is trading at $50. He sets up a long straddle.
Here's what he does:
Buys 10 PEAR January 50 calls at $1.00 each
Buys 10 PEAR January 50 puts at $1.15 each
His total cost (and maximum possible loss) is $2.15 per share, or $2,150 across all 10 contracts (10 contracts × 100 multiplier × $2.15).
The best case: maximum profit
The further PEAR moves from the strike — in either direction — the more the straddle is worth. There's no cap on the upside if PEAR rockets higher. And while a stock can only fall to zero, that's still a long way down.
Question: A week after setting up the straddle, PEAR drops to $42. What's Marcus's unrealized profit (before fees and commissions)?
Answer: $5,850
The call is out of the money and expires worthless. The put is well in the money.
Long call: –$1.00 × 10 × 100 = –$1,000 (loss capped at premium paid)
Long put: ($50 – $42 – $1.15) × 10 × 100 = $6.85 × 1,000 = $6,850
–$1,000 + $6,850 = $5,850
The worst case: maximum loss
PEAR barely moved. The announcement came and went, and the stock sat still. When that happens, both options lose value — the call and the put — and Marcus loses some or all of what he paid upfront.
The maximum loss is the total premium paid: $2,150.
Question: A week later, PEAR is relatively unchanged at $50.10. What's Marcus's unrealized profit or loss?
Answer: –$2,050
The put is out of the money. The call is barely in the money by $0.10 — not enough to matter much.
Long call: (–$1.00 + $0.10) × 10 × 100 = –$0.90 × 1,000 = –$900
Long put: –$1.15 × 10 × 100 = –$1,150
–$900 + (–$1,150) = –$2,050
Marcus positioned for a big move and didn't get one. Almost the entire premium is gone.
The break-even
A straddle has two break-even points — one on each side of the strike. The stock needs to move past either of these prices for the trade to be profitable.
Upside break-even: Strike price + total premiums paid Downside break-even: Strike price – total premiums paid
Question: What are Marcus's break-even prices, assuming total fees and commissions are $20 ($0.20 per share)?
Answer: $52.35 on the upside | $47.65 on the downside
Total premium + fees: $1.00 + $1.15 + $0.20 = $2.35
Upside: $50 + $2.35 = $52.35
Downside: $50 – $2.35 = $47.65
PEAR needs to move more than $2.35 in either direction just to break even. The bigger the move, the better.
What Marcus is actually hoping for
He wants PEAR to make a decisive move — far above $52.35 or well below $47.65. A sharp swing in either direction is the ideal outcome. What he doesn't want is for PEAR to sit still, for the news to be a non-event, or for implied volatility to drop before either option gains enough value to offset the premiums he paid.
The main risk: paying for a move that never comes
The only thing Marcus can lose is the total premium paid — $2,150. But that can disappear quickly if PEAR doesn't move, if the event is less impactful than expected, or if implied volatility falls after the announcement. Time decay also chips away at both options the longer PEAR stays near the strike. Straddles are most at risk when the stock goes quiet.
Putting it all together
A long straddle is a clean way to take a position on volatility itself, rather than direction. If you believe a stock is about to make a significant move and want exposure to that swing without having to call heads or tails, this strategy may be made for you. The cost is defined, the potential is significant, and the only thing you need to be right about is the size of the move — not which way it goes.
To keep learning, explore how a long strangle offers a similar volatility play at a lower upfront cost, with trade-offs on the break-even.