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Chapter 8

Long straddles & strangles

You expect a big move but don't know which way. Buy volatility — a call AND a put together. If the underlying explodes in either direction, you profit. If it stays calm, you lose the double premium. Perfect for event trading.

📖 8 min read 🇮🇳 Sensex on RBI day

The two variants

Straddle costs more but wins on smaller moves. Strangle is cheaper but needs a bigger move to profit.

When they make sense

Situations where you expect a big move but direction is uncertain:

Straddle example — Sensex on RBI day

Example

Sensex long straddle around RBI announcement

Sensex at ₹80,000. RBI policy on Friday. Expected implied volatility is elevated already.

  • Buy 1 Sensex 80,000 CALL @ ₹350
  • Buy 1 Sensex 80,000 PUT @ ₹340
  • Total cost = (350 + 340) × 20 = ₹13,800

Break-evens (at expiry):

  • Upper: 80,000 + 690 = 80,690
  • Lower: 80,000 − 690 = 79,310

Payoffs:

Sensex at 81,500 (huge rally): Call worth 1,500. Put worthless. Payoff = 30,000 − 13,800 = +₹16,200.

Sensex at 78,500 (sharp drop): Put worth 1,500. Call worthless. Payoff = 30,000 − 13,800 = +₹16,200.

Sensex at 80,100 (barely moved): Call worth 100, put worth 0. Payoff = 2,000 − 13,800 = −₹11,800.

Sensex at 80,000 (unchanged — worst case): Both worthless. Loss = ₹13,800.

Strangle example — cheaper, needs bigger move

Example

Sensex long strangle (wider, cheaper)

Same setup, but use OTM strikes:

  • Buy 1 Sensex 80,500 CALL @ ₹180
  • Buy 1 Sensex 79,500 PUT @ ₹170
  • Total cost = (180 + 170) × 20 = ₹7,000

Break-evens:

  • Upper: 80,500 + 350 = 80,850
  • Lower: 79,500 − 350 = 79,150

Half the cost of the straddle, but the profit zone is narrower. Needs a bigger move to reach break-even.

The math

Long straddle formulas

Total cost = Call premium + Put premium

Upper break-even = Strike + Total cost per share

Lower break-even = Strike − Total cost per share

Max loss = Total cost (if underlying = strike at expiry)

Max profit = Unlimited (upside) / Large (downside, capped at strike)

The killer: implied volatility crush

Here’s the trap: on event days, options are already priced for a big move. Implied volatility (IV) is elevated. After the event, IV collapses (“IV crush”) even if the price moves.

Example

IV crush killing a straddle

Sensex at 80,000 pre-RBI. Straddle costs ₹690 (very expensive due to high IV).

Actual move: Sensex ends at 80,400 (+0.5%).

Post-event IV crashes. Call worth 400 intrinsic (was 350, so profit on call = 50). Put worthless (loss 340). Net: 50 − 340 = −₹5,800.

You were right about direction! But IV crush killed the trade.

⚠️ Straddles need MOVES, not just direction

For an event straddle to work, the actual move must exceed what the market has priced in. If Sensex typically moves 700 points on RBI days and the market prices 900 points into the straddle, you need more than 900-point move to profit. Directional accuracy is not enough.

When to enter and exit

Modified strategy: sell before the event

Advanced traders sometimes do the opposite — sell straddles/strangles pre-event to capture IV crush. This is a short straddle (Chapter 9). Higher win rate but tail risk if the move is huge.

When NOT to use long straddles

Try it

Payoff calculator → “Long straddle” preset. Notice the V-shape — profits from moves in either direction, loses in the middle.