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Optionsintermediate

Long Straddle

A long straddle combines buying a call and buying a put at the same strike KK and same expiry TT. The position profits from a large price move in either direction and loses if the underlying stays near the strike. Maximum loss equals the total premium C+PC + P, reached when ST=KS_T = K. Profit is unbounded on the upside and capped at K−C−PK - C - P on the downside. The two break-evens are K±(C+P)K \pm (C + P). A straddle is a textbook long-volatility play.

Why it matters

A long straddle is a bet on movement, not direction. The buyer says "I do not know if the news will be good or bad, but I expect a large reaction." Earnings releases, central-bank decisions, and clinical-trial results are classic straddle setups. The position is long vega, meaning a rise in implied volatility lifts both legs even before the underlying moves. The risk is the opposite. If the announcement is a damp squib and implied vol collapses, the straddle can lose money even with a meaningful price change.

Formulas

Payoff at expiry
Payoff=max⁡(ST−K,0)+max⁡(K−ST,0)=∣ST−K∣\text{Payoff} = \max(S_T - K, 0) + \max(K - S_T, 0) = |S_T - K|
Always non-negative because one of the two legs is in the money for any ST≠KS_T \neq K.
Profit and break-evens
Profit=∣ST−K∣−(C+P),ST∗=K±(C+P)\text{Profit} = |S_T - K| - (C + P), \quad S_T^* = K \pm (C + P)
Two break-evens, one above and one below the strike, symmetric around KK.

Worked examples

Scenario

Buy a straddle on BHP with K=K = 50,payingcall, paying call C = $3$ and put P=P = 2,aheadofaquarterlyresult.Atexpiry, ahead of a quarterly result. At expiry S_T = $58$.

Solution

Call payoff =max⁡(58−50,0)== \max(58 - 50, 0) = 8$. Put payoff =max⁡(50−58,0)== \max(50 - 58, 0) = 0$. Total payoff == 8$. Profit =8−3−2== 8 - 3 - 2 = 3$ per share. The stock cleared the upper break-even of $55, so the straddle profits.

Scenario

Same straddle, but BHP closes at ST=S_T = 51$.

Solution

Call payoff == 1,putpayoff, put payoff = $0,total, total = $1$. Profit =1−3−2=−= 1 - 3 - 2 = -4$ per share. The result moved the stock only a little, less than the $5 combined premium needed to break even. Even with a $1 move in the bullish direction, the straddle loses $4. Direction is right, magnitude is wrong.

Common mistakes

  • ✗A straddle profits whenever volatility rises. The underlying must move enough to cover the combined premium at expiry. A vol spike can boost mark-to-market value, but if it fades before expiry the trade can still lose.
  • ✗Straddles are cheap because both legs offset. Both legs cost premium, so the straddle is roughly twice the cost of a single option. The position is expensive in dollar terms, with the trade-off of profiting from moves in either direction.
  • ✗Straddles are unidirectional volatility bets. Implied volatility and realised volatility are different things. A long straddle can win on realised vol but lose on implied vol mean-reverting, especially after a known event has passed.

Revision bullets

  • •Buy call ++ put, same KK and same TT
  • •Max loss =C+P= C + P at ST=KS_T = K
  • •Two break-evens at K±(C+P)K \pm (C + P)
  • •Long vega and long realised volatility
  • •Classic earnings-event trade

Quick check

A long straddle is profitable at expiry when:

Long straddle on CSL with K=K = 300,call, call C = $5,put, put P = $5$. The upper and lower break-evens are:

Connected topics

Long CallLong PutShort Straddle

In learning paths

Options Path

Sources

  1. Hull (2022), §12.3
    Hull, John C. Options, Futures, and Other Derivatives. 11th ed. Pearson, 2022. ISBN 978-0-13-693997-9.
    Standard textbook treatment of straddles, strangles, and other volatility strategies, including payoff diagrams and break-even calculations.
  2. McMillan (2012), Ch. 16
    McMillan, Lawrence G. Options as a Strategic Investment. 5th ed. Prentice Hall Press, 2012. ISBN 978-0-7352-0466-2.
    Detailed practitioner treatment of long and short straddles, including when each is appropriate around earnings and macro events.
  3. OIC Long Straddle Strategy
    Options Industry Council. Strategy Guide: Long Straddle. Options Education, accessed 2026.
    Industry guide with payoff diagrams, break-even formula $K \pm (C + P)$, and worked examples.
  4. Cboe Options Institute on Volatility Strategies
    Cboe Global Markets. Trading Around Earnings and Events. Cboe Options Institute, accessed 2026.
    Educational reference linking long-straddle outcomes to implied versus realised volatility and event-driven trading.
How to cite this page
Dr. Phil's Quant Lab. (2026). Long Straddle. Derivatives Atlas. https://phucnguyenvan.com/concept/long-straddle
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