Straddle and strangle explained: cost, break-evens and risk
Straddles and strangles are option strategies that depend on how far the market moves, not on which direction it moves. Both use a call and a put together.
Straddle
A long straddle buys a call and a put at the same strike and the same expiry, usually at the strike closest to the current price (at the money). The cost is the sum of the two premiums.
- Upper break-even = strike + total premium
- Lower break-even = strike − total premium
- Maximum loss = the total premium paid, if the market closes exactly at the strike
- Profit is theoretically large if the market moves far in either direction
A short straddle is the opposite: you collect the premium and profit if the market stays near the strike. The maximum profit is the premium. The loss can be very large if the market moves far, so it carries high risk and needs margin.
Strangle
A strangle uses a call and a put at different strikes, both out of the money. For example, with the index at 22,500, you could use a 22,700 call and a 22,300 put. The premium is lower than for a straddle, and the market needs to move further before the position makes money.
- Upper break-even = call strike + total premium
- Lower break-even = put strike − total premium
What the ATM straddle price tells you
The price of the at-the-money straddle is often read as the move the market is pricing in until expiry. If the straddle costs 200 points, the market is pricing in a move of roughly 200 points either way. It is a rough guide that comes from option prices, not a promise.
Time decay
Option premiums fall as expiry gets closer, a process called time decay (theta). Time decay hurts the buyer of a straddle or strangle and helps the seller, other things being equal. This is why the movement has to be large enough to overcome the premium paid.
Things to remember
- Brokerage, taxes and other charges reduce the result. Tradingraph's strategy builder shows an estimate of these.
- The prices in the tool are end-of-day last traded prices. They are not live quotes and may differ from what you can trade at.
- Selling options can lose more than you invest. Make sure you understand margin and risk before trying any strategy.
This page is for information and education only and is not trading advice.