Straddles & Strangles

Introduction: Betting on Volatility

Unlike vertical spreads which profit from directional moves or range-bound conditions, straddles and strangles profit from volatility itself. They're ideal when you expect large price moves but don't know the direction. The classic use case is earnings: when a company reports results, the stock often moves 3-5% in one direction or another, but you can't predict which.

These strategies require understanding volatility crush, expected moves, and proper position sizing. Get them right and you'll capture earnings moves. Get them wrong and you'll suffer from the post-earnings volatility collapse.

Long Straddle: Buying ATM Call and Put

The Basic Structure

A long straddle consists of buying both a call and a put at the same strike price:

Real Example: Earnings Straddle

Straddle Pricing and Expected Moves

Market makers price straddles based on the expected move. If AAPL typically moves 4% on earnings, the straddle cost will reflect that. To profit, the actual move must exceed the straddle cost:

Stock Move	Call Value	Put Value	Total Value	P&L
No move ($195)	$0 (OTM)	$0 (OTM)	$0	-$1,230 (max loss)
3% down ($189)	$0	$600	$600	-$630 (partial loss)
6% down ($183)	$0	$1,200	$1,200	-$30 (near break-even)
10% down ($175.50)	$0	$1,950	$1,950	+$720 (profit)
10% up ($214.50)	$1,950	$0	$1,950	+$720 (profit)

Long Strangle: Buying OTM Call and Put

The Basic Structure

A strangle is similar to a straddle but uses out-of-the-money options, making it cheaper upfront:

Real Example: Earnings Strangle

Strangle vs. Straddle Comparison

Factor	Straddle	Strangle
Initial Cost	Higher ($1,230)	Lower ($610)
Move Required	6.3% in either direction	5.6% (to $200 or $190)
Probability of Profit	Lower (move must exceed premium)	Lower (wider but OTM)
Max Loss	Full premium ($1,230)	Full premium ($610)
Best Use	Stock expected to move significantly	Stock might move, want lower cost

The Volatility Crush Problem

Why Straddles/Strangles Fail After Earnings

The biggest risk to straddles is volatility crush. Before earnings, implied volatility (IV) is high, inflating option prices. After earnings (whether the move meets expectations or not), IV collapses as uncertainty is resolved.

Managing Volatility Crush

• Close BEFORE earnings: Don't hold through the event; close positions the day before to avoid crush
• Trade high-move events: FDA approvals, lawsuit decisions create definitive moves that don't reverse as much
• Close 50% profit early: If the straddle gains 50% before earnings, close it and take the win
• Size smaller: Accept smaller absolute gains to reduce absolute losses from crush

Short Straddles and Short Strangles

Selling Volatility

Just as you can buy straddles (betting on high volatility), you can sell them (betting on low volatility or collapse):

Real Example: Post-Earnings Short Straddle

Short straddles are typically safer than long straddles post-earnings because IV has already crushed. However, assignment risk is significant—if the stock moves beyond the strikes, you're forced to take a position.

When to Buy vs. Sell Vol

Condition	IV Rank	Action	Strategy
Before major event (earnings, FDA)	High (75%+)	Buy straddle/strangle	Long straddle
Immediately after event	Dropping (from high)	Sell vol or avoid	Close long positions or short straddle
Stable, quiet period	Low (20%)	Sell straddle/strangle	Short straddle
Anticipation building	Rising (from low)	Close short vol positions	Exit short straddles

Expected Move Calculations

Using IV to Estimate Movement

Market makers use a formula to estimate the expected move based on IV:

Real Earnings Straddle Example: Full Scenario

Key Takeaways