Everything so far was about one option at a time. From here on you combine them, and each combination is a way of saying something precise about volatility. The first is the one traders use for a pure view on movement, without caring which way: the straddle.
A long straddle is a call and a put at the same strike and the same expiration, both bought. Use the at-the-money strike. Whichever way the stock moves, one leg gains. The cost is the two prices added together, and that total is what the market charges for movement over that period. You will hear it called "the straddle" as if it were a single number, because on a desk it is.
Breakevens
Say a stock is at $200, the $200 call is $6.10 and the $200 put is $5.90. The straddle costs $12.00, which is $1,200 for one call and one put. At expiration you need the stock at least $12 away from $200 in either direction to get your money back. So the breakevens are $212 and $188. Between them you lose something; exactly at $200 you lose the whole $12. Beyond them you gain dollar for dollar with no ceiling.
One $100 call and one $100 put, 30 days out at 30% volatility. The breakevens are marked where the V crosses zero. Drag days down to watch the curve sink onto the V, and raise volatility to see the position gain with the stock unmoved.
The dark V is the result at expiry. The green curve is the same position with time still left, and it sits above the V because the options still carry time value. Drag the days slider toward zero and the curve sinks onto the V: that sinking is the theta you pay. Raise the volatility slider and the whole curve lifts, because the options are marked at a higher implied volatility. That is the straddle being long vega.
Divide the straddle by the stock price and you get the implied move as a percentage: $12 on $200 is 6%. This is the quickest read of how much movement is priced in, and you will use it constantly.
The short side
A short straddle is the same pair sold. You collect $12 and want the stock to sit still. Your maximum profit is the $12, kept in full only if the stock closes exactly at the strike. Your loss grows without limit as the stock runs either way, so a short straddle is a position you watch and hedge, never one you leave alone. Its Greeks tell the story: short gamma, short vega, long theta. It earns the decay every quiet day and pays for every big move.
The strangle
A strangle moves the two strikes apart: an out-of-the-money put below the stock and an out-of-the-money call above it. Traders usually pick both by delta, and 25 delta is the common choice, because "the 25-delta strangle" means the same thing on any stock at any price. Both legs are cheaper than the at-the-money options, so the strangle costs less than the straddle. In exchange the stock has to travel further before either leg has any intrinsic value.
A $95 put and a $105 call. Compare the entry cost in the note with the straddle above, then find where the breakevens sit: further out, because the stock must first reach a strike.
The flat floor between the two strikes is the whole premium lost: anywhere in that band both options expire worthless. Long, the strangle is a cheaper, wider bet on a big move. Short, it collects less than the straddle but gives the stock a range to sit in before you are losing at expiration.
| Straddle | 25-delta strangle | |
|---|---|---|
| Strikes | Both at the money | Put below, call above |
| Cost | Higher | Lower |
| Move needed (long) | Smaller | Larger |
| Room to sit (short) | None, every dollar from the strike costs | The gap between the two strikes |
What you are really buying
At expiry a straddle is a bet on the size of one move. Before expiry it is something subtler: a position with the most gamma, theta and vega you can get at one strike. Each leg brings the same gamma and vega, so the straddle carries double of each, and its delta starts near zero because the call's positive delta and the put's negative delta cancel. That is why desks treat it as the cleanest volatility position there is. Hedge the small delta that appears as the stock moves and what is left is a pure contest between the movement the stock delivers and the movement the straddle priced in.
Switch between gamma, theta and vega for a $100 straddle with 60, 30 and 10 days left. Gamma and theta peak together at the strike; vega is largest on the longest-dated line.
Switch between the Greeks and the pattern from Module 5 comes back, doubled: gamma and theta peak together at the strike and sharpen as expiry nears, and vega is largest with more time left. A strangle has the same shape spread wider and lower, because its strikes sit away from the stock.
The maths: breakevens and the straddle as a volatility quote
For a straddle at strike K bought for a total premium D = C + P, the expiry breakevens are K - D and K + D. For a strangle with put strike Kp and call strike Kc and total premium D, they are Kp - D and Kc + D. Worked example: put $95 at $1.40 and call $105 at $1.60 is D = $3.00, so the breakevens are $92 and $108, against $93 and $107 for a $7 straddle at $100. The strangle is cheaper but needs the stock to travel further.
At the money an option is worth about 0.4 × S × v × √T, so a straddle, two of them, is worth about 0.8 × S × v × √T. That is roughly 0.8 of a one-standard-deviation move, and it runs the other way too: v ≈ straddle / (0.8 × S × √T). A $100 stock with a 30-day straddle at $6.85 gives 6.85 / (0.8 × 100 × 0.287), about 0.30, or 30% implied volatility. That is how a desk reads a straddle price as a vol quote in its head.
Straddle or strangle when IV is high?
Both are long vega, so when implied volatility is already high you pay a high price for either one, and a fall in IV takes value from both. The straddle carries more vega in dollars, so a fall in IV costs it more. The strangle costs less and has less to lose, but its breakevens sit further out, so the stock has to travel further before it pays.
A common rule: buy the straddle to bet on volatility rising on its own, and the strangle to bet on volatility rising together with a move big enough to carry the stock past one of its strikes. Before either, ask why IV is high. If an event such as earnings is priced in, IV usually drops once the news is out, which is IV crush, and the trade then works only if the stock moves more than the straddle priced in. That is the straddle divided by the stock price, the same implied move as above.
Your turn
Open TSLA in the Terminal. Read the at-the-money call and put mids on the monthly chain and add them. Take the pair into the Straddle Calc and read the breakevens. Then find the 25-delta strikes from the Delta columns and price the strangle.