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What is a long straddle?
Understand why buying a call and put at the same strike needs a large move to overcome both premiums
Prepared by Mark · Primary sources below
Direct answer
A long straddle buys one call and one put on the same underlying, with the same strike and expiration. It is built for a large move in either direction, not for a particular direction. The maximum loss at expiration is generally the combined premium paid, while the two premiums create an upper and lower break-even that the stock must pass
It expresses a view on movement, not direction
A call benefits from a move higher and a put benefits from a move lower. Holding both creates a position that can gain from a sufficiently large move either way, often around an event where the eventual direction is uncertain
The two premiums set the break-even range
At expiration, the upper break-even is the strike plus the combined premium paid and the lower break-even is the strike minus that combined premium. Between those levels, the position has not recovered its entry cost
The price of waiting is visible in both legs
Both options can lose time value while the stock remains near the strike. If implied volatility falls, the resale value of both legs can decline as well. A holder who does not want an exercise-created stock position should understand the brokerage firm's expiration process
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