Straddles and strangles

Straddles and strangles are volatility trades: you profit from a big move in either direction and lose if the underlying sits still. You are betting on magnitude, not direction.

The long straddle

Buy a call and a put at the same strike, same expiry.

Stock at 100
Buy call strike 100 for 3.00
Buy put  strike 100 for 3.00
Total cost (max loss) = 6.00

You profit if the stock moves more than 6 in either direction by expiry.

Above 106  -> the call pays
Below 94   -> the put pays
Between 94 and 106 -> you lose part or all of the 6.00

The long strangle

Same idea but with OTM strikes (call above, put below). It is cheaper because both options are OTM — but needs an even bigger move to pay off.

Buy call strike 105 for 1.50, put strike 95 for 1.50
Total cost = 3.00, but needs a move beyond 105+3 or 95-3.

When to use them

When you expect a large move but are unsure of direction — before earnings, a court ruling, a central-bank decision.

Honest risk

This is where the volatility crush bites hardest. You are buying two options, both loaded with extrinsic value and both decaying. If the expected event passes with a smaller move than the market priced in, implied volatility collapses and both legs lose value at once — you can be "right that it moved" and still lose. Straddles bought into already-elevated implied volatility are a classic way to lose 100% of the premium.