Straddles and strangles are volatility strategies that profit when the underlying stock makes a large move in either direction. Both strategies involve buying a call and a put option with the same expiration date. The key difference is that a straddle uses the same strike price for both options, while a strangle uses different strikes (typically out-of-the-money for both).

A long straddle is constructed by buying a call and a put at the same strike price. The total cost is the sum of both premiums. You profit when the stock moves above the upper breakeven (strike plus total cost) or below the lower breakeven (strike minus total cost). The maximum loss is the total premium paid, which occurs when the stock is exactly at the strike price at expiration.

A long strangle is similar but uses a higher strike for the call and a lower strike for the put. This reduces the total cost compared to a straddle but requires a larger stock move to become profitable. The upper breakeven is the call strike plus total cost per share, and the lower breakeven is the put strike minus total cost per share.

Formulas

Total Cost = (Call Premium + Put Premium) × 100 × Contracts

Upper Breakeven = Call Strike + Total Cost Per Share

Lower Breakeven = Put Strike - Total Cost Per Share

Max Loss = Total Cost (both options expire worthless)

Example

You buy a $100 straddle (call and put at $100 strike) for a $4.00 call premium and $3.50 put premium on 1 contract. Total cost is ($4.00 + $3.50) × 100 = $750. Upper breakeven is $100 + $7.50 = $107.50. Lower breakeven is $100 - $7.50 = $92.50. The stock must move more than $7.50 from the strike in either direction for the trade to profit.