Straddles and strangles
A long straddle buys a call and a put at the same strike, usually at the money. A long strangle buys an out-of-the-money call and an out-of-the-money put, which costs less but needs a bigger move. Both profit if the shares move far enough in either direction, and both lose the whole premium if they do not.
cost = call premium + put premium
upper breakeven = call strike + cost · lower breakeven = put strike − cost
A worked example
With the figures loaded above, the shares are at $100 ahead of an earnings report. You buy the 100 call for $4.10 and the 100 put for $3.90.
- Cost is $8.00 a share, $800 per straddle, and that is the most you can lose.
- Breakevens are $100 + $8 = $108 and $100 − $8 = $92.
- Move needed is 8.0% either way by expiry, just to get your money back.
A strangle on the same shares might buy the 105 call for $1.60 and the 95 put for $1.50. It costs $3.10, a lot less, but breaks even at $108.10 and $91.90: further out than the straddle, because the strikes start $5 away.
Is the move big enough?
The options market already prices the move it expects. A common shortcut puts the expected move at about 85% of the at-the-money straddle price: 0.85 × $8.00 = ±$6.80. This straddle needs ±$8.00. To profit, the shares have to move further than the market expects, which by construction happens less than half the time.
That is the core difficulty of buying straddles before events. The premium already contains the event. You are betting the move will be bigger than a crowd of option sellers thinks.
- Volatility crush. Implied volatility usually collapses right after earnings. Even a decent move can leave the straddle worth less than you paid. The IV crush guide works through it.
- Time decay. Both options lose value every day the shares stand still.
- Selling instead. A short straddle or strangle reverses every figure here and has unlimited risk on the call side. The defined-risk version is an iron condor.
Get the expected move for any expiry from the expected move calculator.