Sometimes you expect a big move but do not know which way. A long straddle buys a call and a put at the same strike. A long strangle buys an OTM call and an OTM put at different strikes, which is cheaper but needs a larger move.
Example straddle
The stock trades at 300. You buy the 300 call for 12 and the 300 put for 11, a total of 23. You need the stock above 323 or below 277 at expiry to make money.
The catch
- Before events such as results, implied volatility is high, so straddles are expensive.
- After the event, IV usually drops. The stock has to move more than the market expected just to break even.
- Theta works against you every day you hold the position.
When it can work
Straddles work best when you have a good reason to expect a move larger than what the option prices already imply, and when you buy before IV has risen too much.
This article is for education only and is not financial advice. Options involve risk and are not suitable for every investor.