Buy a call and a put at the same strike (ATM) and the same expiration. It gains from a sharp move in either direction. Its risk: IV Crush.
The structure
A long straddle (Straddle) buys a call and a put together at the same strike (at the money) and the same expiry. It takes no view on direction at all. The whole bet is that a big move is coming, in either direction.
When to use it
Ahead of a two-way unknown whose direction you cannot call: a court ruling, a regulator's decision, decisive results. Or when Implied Volatility looks cheap against a storm you see coming and the market does not.
Maximum profit and loss
Maximum loss is the sum of the two premiums if price dies in place. Profit is open in both directions once the move passes the breakevens: strike plus the total on the upside, strike minus it on the downside. The straddle's own price is the Expected Move (Expected Move) the market is pricing.
Hypothetical example
A stock at $100 ahead of a key ruling. A straddle at the $100 strike costs $9, so the breakevens are $91 and $109. The stock jumps to $120: the call leg alone is worth $20 and the trade gains $11. It stays at $101: nine tenths of the cost melts away.
Common mistake
Buying it ahead of well-known events: implied volatility is inflated there and the move is already priced generously, so reality has to beat what is priced in. Then the Volatility Crush hits and eats into any profit. Buy a straddle where nobody is paying attention, not where the crowd is.
Where to see it on the platform
The calculator builds it and computes its two breakevens. Its at-the-money price is the same Expected Move the platform tools show around events.
