What Is a Straddle?
In option trading, a straddle is a position which includes two options: a call and a put, both with the same strike price and the same expiration date.
Long Straddle Position
When you buy a call and a put with the same strike, same expiration and on the same underlying, you have a long straddle position (or long straddle strategy or long straddle trade).
A long straddle position is a long volatility trade, as it makes profit when the underlying prices moves a lot, away from the options’ strike price to either direction. When this happens, one of the options gets in the money. For a long straddle trade to be profitable, you need the profit of the in-the-money option to be high enough to offset the initial cost of both options.
Conversely, the position loses money when the underlying price stays near the strike.
Here you can find detailed explanation of long straddle position, its payoff, risk and trading recommendations.
Short Straddle Position
When you sell a call and a put with the same strike, expiration and underlying, you have a short straddle position.
Short straddle payoff is inverse to a long straddle position. It is a short volatility trade – makes money when the underlying price stays near the options’ strike price, so neither of the options gets far enough in the money to offset the premium which you have received when selling the options in the beginning. Short straddle payoff is of course inverse to long straddle payoff.