What is a 'Straddle'
A straddle is an options strategy in which the investor holds a position in both a call and put with the same strike price and expiration date, paying both premiums. This strategy allows the investor to make a profit regardless of whether the price of the security goes up or down, assuming the change in the underlying stock price is significant enough to move past either of the strike prices and offset the cost of the premiums.
On the chart above, the dotted lines show the implications of buying a call or put in isolation. The the solid vshaped line shows the profit/loss when buying both the call and put. As the stock price falls or rises the strategy makes money. If the stock price doesn't move much, the strategy loses money.
Breaking Down the 'Straddle'
Straddles are a good strategy to pursue if an investor believes that a stock's price will move significantly but is unsure as to which direction. This is a neutral strategy. The investor is indifferent whether the stock goes up or down, as long as the price moves enough for the strategy to earn a profit.
Straddle Mechanics and Characteristics
The key to creating a long straddle position is to purchase one call option and one put option. Both options must have the same strike price and expiration date. If nonmatching strike prices are purchased, the position is then considered to be a strangle, not a straddle.
Long straddle positions have unlimited profit and limited risk. If the price of the underlying asset continues to increase, the potential profit is unlimited. If the price of the underlying asset goes to zero, the profit would be the put's strike price less the premiums paid for the options. In either case, the maximum risk is the total cost to enter the position, which is the combined cost of the call and put option.
The profit when the price of the underlying asset is increasing is:
Profit(up) = Price of the underlying asset  the strike price of the call option  net premium paid. Since each stock option represents 100 shares, the profit is multiplied by 100 for one contract, 200 for two contracts, and so on.
The profit when the price of the underlying asset is decreasing is:
Profit(down) = Strike price of put option  price of the underlying asset  net premium paid. As with the scenario above, multiply by 100 (one contract) to get the total profit on the trade.
The maximum loss is the total net premium paid plus any trade commissions.
There are two breakeven points in a straddle position. The first, known as the upper breakeven point, is equal to strike price of the call option plus theÂ total premium cost. The second, the lower breakeven point, is equal to the strike price of the put option less the total premiums paid.
Straddle Example
A stock is priced at $50 per share. A call option with a strike price of $50 is priced at $3, and a put option with the same strike price is also priced at $3. An investor enters into a straddle by purchasing one of each option.
The position will profit at expiration if the stock is priced above $56 or below $44. If the stock moves to $65, the position would profit:
Profit = $65  $50  $6 = $9
If the trader bought and sold one contract they make $9 x 100 shares = $900. They laid out $600 for the trade [($3 x 100) + ($3 x 100)].
If the stock price is right at $50 at expiration, they lose $600. If the price is above or below $50, they will recoup some of their cost since one of the options will have some intrinsic value. They can sell the option with intrinsicÂ value just prior to expiration to recoup some of the initial cost, which will reduce the loss.

Covered Straddle
An option strategy that involves writing the same number of puts ... 
Strike Price
Strike price is the price at which the underlying asset of a ... 
In The Money (ITM)
In the money means an option has intrinsic value, which is determined ... 
Option
Options are financial derivatives that give the option buyer ... 
Bear Spread
1. An option strategy seeking maximum profit when the price of ... 
Iron Butterfly
An iron butterfly is a options strategy created with four options ...

Trading
Profit On Any Price Change With Long Straddles
In this strategy, traders cash in when the underlying security rises  and when it falls. 
Personal Finance
Tips for Answering Series 7 Options Questions
We'll show you how to ace the largest and most difficult section of this exam. 
Trading
Options Strategies for Your Portfolio to Make Money Regularly
Discover the optionwriting strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums. 
Trading
4 Popular Options Strategies for 2016
Learn how long straddles, long strangles and vertical debit spreads can help you profit from the volatility that stock analysts expect for 2016. 
Trading
How To Profit From Volatility
We explain four key strategies to profit fom volatility in markets. 
Trading
Using Options To Pay Off Debt
We tell you about four option strategies that could provide a way to pay off your debt. 
Trading
The Basics of Options Profitability
Learn the various ways traders make money with options, and how it works. 
Trading
Getting acquainted with options trading
Learn about trading stock options, including some basic options trading terminology. 
Trading
Index Options: A HowTo Guide
Index options, financial derivatives that derive their value from a stock index, can provide stability and peace of mind for less risky investors.

What's the difference between a straddle and a strangle?
Straddles and strangles are option strategies that take advantage of significant moves up or down in a stock's price. Learn ... Read Answer >> 
How do I set a strike price for an option?
Learn about the strike price of an option and how to set a strike price for call and put options depending on risk tolerance ... Read Answer >> 
How does the term 'in the money' describe the moneyness of an option?
Find out what in the money means about the moneyness of call or put options and what it indicates about the relationship ... Read Answer >> 
What is the difference between in the money and out of the money?
Learn how the difference between in the money and out of the money options is determined by the relationship between strike ... Read Answer >> 
How can derivatives be used to earn income?
Learn how option selling strategies can be used to collect premium amounts as income, and understand how selling covered ... Read Answer >>