What it is
You buy a call and a put at the same strike, usually at today's price, with the same expiry. One of them gains if the stock rises and the other gains if it falls, so the position does not need to know the direction. It pays two premiums up front, and that total is the most it can lose.
What has to happen for it to make money
The stock has to move further than the two premiums together, in either direction, by expiry. The break-evens sit that far above and below the strike. Past either one, every dollar of movement is profit, and on the upside there is no limit to it.
The premiums are the market's estimate of how far the stock will travel. So the real bet is that the stock moves more than the market expected, which is a harder thing to be right about than "it will move a lot".
Rising volatility helps before expiry. If the market grows more nervous while you hold it, both options become more valuable, and the straddle can be sold for a gain even if the stock has not moved much.
Once it is on
Time works against it every day, on both options at once. That makes the waiting expensive, and it is why straddles are often bought ahead of a specific event, such as earnings, and sold soon after it. Many holders sell before expiry rather than hold to it, because the time value still left in the options is worth collecting.
What goes wrong
Nothing happens. A stock that sits at the strike is the worst case: both options expire worthless and both premiums are gone. A small move is only a smaller loss.
Volatility falling after the event. Options before earnings are priced for a big move. Once the news is out, that premium drains away fast, so a move that looked large can still leave the straddle worth less than it cost. Buying expected excitement is paying the price of it.
Pros and cons
- Pro: a large swing up or down pays it.
- Pro: the most it can lose is known: the two premiums.
- Pro: no margin needed, since nothing is sold.
- Con: loses when the stock is quiet, which is often.
- Con: both options lose value every day it waits.
- Con: expensive just before the events it is bought for.
In Restrike
Both legs are bought options, so the Log tracks them in dollars and counts a close in the win rate, but leaves them out of the premium-kept meter, which only means something for options that were sold. Label the two with the same strategy to score them together. Restrike imports them read-only from your broker and never places a trade.