Predict Nothing, Prepare For Everything: The Straddle Way

1. WHAT IS A LONG STRADDLE

Imagine you’re going to a cricket match and you’re not sure if it will rain or stay sunny. So you buy both a raincoat and sunscreen. Whatever happens, you’re ready – but you paid for both.

A long straddle is exactly that in options trading. You buy a call option (predict the price goes up) AND a put option (predict the price goes down) with the same strike price and the same expiry date. You don’t care which way the stock moves – you just need it to move a lot.

HOW IT WORKS

1. Find a stock or index that’s about to have big news (you expect fireworks, not calm).

2. Pick an expiry that covers the event + a little extra time (weekly or monthly).

3. Buy the call and buy the put at the same time → this is your straddle.

4. Sit back and watch. Close the trade for profit when the stock jumps (or cut losses if nothing happens).

WHEN TO CONSIDER A LONG STRADDLE

Perfect timing examples:

• Company earnings day (stocks often jump 5-10% or more)

• Central bank interest-rate decisions

• Major elections or budget announcements

• Big product launch day of the company

Warning: Option prices usually get expensive just before these events because everyone expects a move (this is called high implied volatility).

EXAMPLE

Let’s use simple numbers.

Stock price today = ₹1,000

You buy the ₹1,000 call for ₹40

You buy the ₹1,000 put for ₹40

Total premium paid = ₹80 per share

BREAK-EVEN PRICES:

Upper break-even = 1000 + 80 = ₹1,080

Lower break-even = 1000 – 80 = ₹920

OUTCOMES AT EXPIRY:

• Stock at ₹1,150

Call worth 150, put worth 0 → Profit = 150 – 80 = ₹70

• Stock at ₹880

Put worth 120, call worth 0 → Profit = 120 – 80 = ₹40

• Stock at ₹1,000 (no movement)

Both expire worthless → Loss = ₹80 (maximum loss)

• Stock at ₹1,030

Call worth 30, put 0 → 30 – 80 = ₹50 loss (small moves still lose)

MAXIMUM PROFIT (UPSIDE MOVE)

Formula:

Max Profit (if price rises) = Unlimited – Total Premium Paid

Explanation:

There is no cap on how high the stock can go, so profit is theoretically unlimited. Your only cost is the premium you paid upfront.

MAXIMUM PROFIT (DOWNSIDE MOVE)

Formula:

Max Profit (if price falls) = Strike Price – Total Premium Paid

Explanation:

The price can only fall to zero, so the downside profit is large but limited. You still subtract the premium you paid.

MAXIMUM LOSS

Formula:

Max Loss = Total Premium Paid

Explanation:

You lose money only if the stock stays near the strike price. In that case, both options expire worthless, and you lose just the premiums.

BREAKEVEN POINTS

Formula:

Upper Breakeven = Strike Price + Total Premium Paid

Lower Breakeven = Strike Price – Total Premium Paid

Explanation:

These are the exact prices the stock must reach at expiry for you to recover your premium. Any move beyond these points becomes profitable.

PROFIT / PAYOFF FORMULA

Formula:

Long Straddle Payoff = Max(0, Underlying Price – Strike Price) + Max(0, Strike Price – Underlying Price)

Long Straddle Profit = Payoff – Total Premium Paid

Explanation:

You add the value of whichever option ends up in the money and subtract the premium. The bigger the move away from the strike price, the bigger the profit.

2. WHAT IS A SHORT STRADDLE

Imagine you own a tiny ice-cream stall near an office. On most days, people buy a few cones, and you make steady money. But if a sudden heatwave or storm hits, you either run out of stock or nobody shows up – disaster.

A short straddle is the options version of that stall. You sell a call option AND sell a put option with the same strike price and expiry. You collect money (the premium) immediately. You win big if the stock price stays quiet and ends very close to your strike.

HOW IT WORKS

1. Find a stock that’s been sleepy and has no major news for weeks.

2. Pick the strike closest to today’s price (ATM gives the highest premium).

3. Choose an expiry (often 30–45 days out for good premium vs. risk balance).

4. Sell the call and sell the put at the same time → money hits your account instantly.

5. Pray the stock stays inside your break-even range until expiry.

WHEN TO CONSIDER A SHORT STRADDLE

Good situations:

• After a big move when volatility has crashed

• Holiday periods or summer lulls

• Stocks stuck in a tight range for months

EXAMPLE

Let’s use simple numbers.

Stock price today = ₹1,000

You sell the ₹1,000 call for ₹40

You sell the ₹1,000 put for ₹40

Total premium received = ₹80 per share

Break-even prices:

Upper break-even = 1000 + 80 = ₹1,080

Lower break-even = 1000 – 80 = ₹920

OUTCOMES AT EXPIRY:

• Stock at ₹1,000 (no movement)

Both expire worthless → You keep ₹80 (maximum profit)

• Stock at ₹1,150

Call is worth 150 → Loss = 150 – 80 = ₹70 loss

• Stock at ₹880

Put is worth 120 → Loss = 120 – 80 = ₹40 loss

• Stock at ₹1,030

Call worth 30 → Net = 30 – 80 = ₹50 profit (small moves still profit.

MAXIMUM PROFIT

Formula:

Max Profit = Total Premium Received

Explanation:

Your best-case scenario happens when the stock stays exactly at the strike price at expiry, the options expire worthless, and you keep the entire premium as profit.

MAXIMUM LOSS

Formula:

Max Loss = Unlimited (if price rises) or Very Large (if price falls)

Because:

• Call side has unlimited loss potential

• Put side can lose up to Strike Price – 0

Explanation:

If the price makes a big move up or down, the sold option becomes expensive, and losses can grow dramatically. A short straddle needs the market to stay calm.

BREAKEVEN POINTS

Formula:

Upper Breakeven = Strike Price + Total Premium Received

Lower Breakeven = Strike Price – Total Premium Received

Explanation:

As long as the price stays between these two levels, the short straddle still earns money. Beyond them, losses begin.

PAYOFF / PROFIT FORMULA

Formula:

Short Straddle Payoff =

– Max(0, Underlying Price – Strike Price) – Max(0, Strike Price – Underlying Price) + Total Premium Received

Short Straddle Profit =

Premium Received – Option Losses

Explanation:

You keep the premium but must pay for whichever option finishes in the money. The farther the price moves from the strike, the bigger the loss.

GOPOCKET’S THOUGHT

• Straddles can be useful tools, but they require a clear understanding of volatility, risk, and expected movement.

• Use these strategies only when they fit your market view and overall financial plan.

• Start small, manage risk tightly, and avoid trading on emotion or guesswork.

• Track results and refine your approach based on data and disciplined decision-making.

DISCLAIMER:

This blog is meant purely for educational purposes and should not be treated as financial or investment advice. Options trading involves significant risks, including the potential loss of capital. Always evaluate your personal risk capacity and, if needed, consult a qualified financial professional before making trading decisions. GoPocket does not guarantee performance or outcomes from any strategy discussed.

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