A long straddle is an options strategy that involves simultaneously buying one call option and one put option on the same underlying, with the same strike price and same expiry. The trade is delta-neutral at initiation and profits from a large move in either direction — it is a pure long-volatility bet.
Maximum loss is limited to the total premium paid for both legs, realised if the underlying expires exactly at the strike. Maximum profit is theoretically unlimited above the breakeven on the call side and capped only by the strike going to zero on the put side. Breakevens are: strike + total premium (upside) and strike − total premium (downside).
Straddles are commonly used ahead of events with high uncertainty over direction but high expected magnitude: budget day, RBI policy, election results, earnings, large M&A vote.
Example 1: Nifty is at 24,000 a day before the Union Budget. A trader buys the 24,000 call at premium 150 and the 24,000 put at premium 140 — total cost 290 points. To profit, Nifty must close below 23,710 or above 24,290 by expiry. If Nifty stays between 23,800 and 24,200, both options expire near zero and the trader loses the entire 290 points.
Example 2: A trader buys a straddle on Reliance one week before Q4 results expecting a significant move. Implied volatility was elevated at entry; after results, IV crashes (a phenomenon called the "vol crush"). Even if the stock moves, the trade can lose because the vol drop reduces both legs' value.
Key risk — IV crush: post-event, implied volatility tends to collapse, eating into option premiums even when the underlying moves. Straddles often work poorly into a known event.
Disclaimer: Educational content from MintByte (ARN-314872, MFD). Examples are illustrative; option premiums vary. SEBI Investment Adviser registration is in process; we do not recommend specific options trades. Options trading involves substantial risk of loss.