Straddle
TradingDefinition
Long a call and a put at the same strike and expiration. Profits if the underlying makes a big move in either direction. Bet on volatility, not direction.
Used pre-earnings, pre-FDA decisions, pre-FOMC. Risk: implied vol crush after the event can wipe both legs even if the stock moved (the famous "vol crush" problem).
Used pre-earnings, pre-FDA decisions, pre-FOMC. Risk: implied vol crush after the event can wipe both legs even if the stock moved (the famous "vol crush" problem).
Example
XYZ at $100. Buy $100 call for $3, $100 put for $3. Total cost $6. Profitable if stock moves above $106 or below $94 by expiration. At $115, profit = $9.