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Updated 3 min readTapeboard DeskEdited by Marcus Reilly

What is a Straddle? Definition, Formula, and Example

A long straddle buys an at-the-money call and put with the same strike and expiration, profiting when the underlying moves sharply in either direction by more than the combined premium paid.

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What is a straddle?

A straddle is an options position with both a call and a put at the same strike and the same expiration. A long straddle buys both legs and profits when the underlying moves far enough in either direction to exceed the premium paid. A short straddle sells both legs and profits if the stock stays near the strike through expiration. The long straddle is the purest volatility bet available to a retail trader — direction-agnostic, dependent only on the size of the realized move relative to what was already priced in.

How a straddle is structured and priced

Pick a strike K (usually at-the-money), an expiration, and buy or sell one call and one put at that strike. Let C = call premium, P = put premium, total debit = C + P.

Long straddle breakevens at expiration:

Upper BE = K + (C + P)

Lower BE = K − (C + P)

Max loss (long) = C + P. Max profit: unbounded on the call side; (K − C − P) × 100 per contract on the put side.

The implied move priced by an ATM straddle is often used as a proxy for the expected earnings move:

Expected move ≈ (C + P) / Spot

A stock at $100 with a $4 straddle prices a ±4% move by expiration.

Worked example

An earnings straddle on TSLA into the April 2026 print. Stock at $245 on 2026-04-22 with earnings after close. The weekly $245 call trades $9.40, the $245 put trades $9.10. Total debit = $18.50 × 100 = $1,850 per straddle. Breakevens: $263.50 and $226.50. The market is pricing a ~7.5% move.

Scenario A: TSLA reports, gaps to $268 at the open on 2026-04-23. The call is worth intrinsic $23 plus residual time value; the put decays to $0.15. Combined value $23.15, profit $4.65 × 100 = $465 per pair, a 25% return in one day.

Scenario B: TSLA opens flat at $246. Post-earnings IV collapses 35%. The call drops to $2.80, the put to $2.10, combined $4.90. Loss $13.60 × 100 = $1,360 — a 73% loss despite the stock barely moving, because the straddle needed the move *and* the vol.

When traders use straddles

  • Earnings plays where implied volatility is priced cheaply relative to historical realized move on that ticker.
  • Binary events: FDA decisions, court rulings, Fed meetings, merger-arb break/close dates.
  • Pure volatility bets when a trader has a view on upcoming realized vol but no directional edge.
  • Gamma scalping: long straddles carry positive gamma; market makers delta-hedge them dynamically to harvest realized vol against the premium paid.

To price the setup on live quotes, the TSLA options page lays out the full chain across strikes and expirations, so the at-the-money straddle cost and its implied move are a click away before the print.

Limitations and common misconceptions

The most-missed risk is IV crush. Earnings straddles routinely lose money on 3–5% stock moves because implied volatility collapses the moment uncertainty resolves. A straddle needs the realized move to exceed the *implied* move priced in — not merely to be nonzero. Theta decay bleeds both legs simultaneously; a held-through-time straddle loses to the clock even if the stock drifts. Short straddles have unbounded loss and undefined margin requirements under Reg T portfolio margin — a GME-style gap can wipe an account in one session. Finally, "ATM straddle" does not mean "ATM forever" — as the stock moves, the straddle becomes directional and loses its pure-vol character, converting into a synthetic long or short with full directional risk.