What is a Straddle? How to make money from price volatility

If you have heard of Straddle but haven’t truly understood how it works, this article is for you. Straddle is a widely used options trading technique in the financial markets, allowing investors to capitalize on strong price volatility without needing to predict whether the trend will go up or down.

How does a Straddle work?

To execute a Straddle, you need to follow two steps:

1. Buy a (Call option) - This gives you the right to buy the asset at a fixed price (called the strike price).
2. Buy a (Put option) - This gives you the right to sell the asset at the same fixed price.

Both options must have identical characteristics: same strike price, same expiration date. This is the key to making this strategy effective.

Real-world example with Ethereum

Imagine Ethereum (ETH) is trading at $3,000. You anticipate a major event that could cause significant price movement, but you’re unsure of the direction. So, you decide to:

• Buy a call option at $3,000 with a cost of $100
• Buy a put option at $3,000 with a cost of $100
• Total cost: $200

Possible scenarios

If the price surges (ETH to $4,000) Your call option will be worth $1,000 (4,000 – 3,000), while the put option becomes worthless. Your net profit: 1,000 – 200 = $600.

If the price drops (ETH to $2,000) This time, your put option will be worth $1,000 (3,000 – 2,000), while the call option becomes worthless. Net profit: 1,000 – 200 = $600.

If the price remains relatively stable (ETH at $3,100) The call option gains $100 but isn’t enough to cover the initial cost. You will incur a loss of $100.

When should you use a Straddle?

This strategy works best when you anticipate a major upcoming event:

• Release of significant financial reports
• Central bank policy decisions
• Important economic news
• Technology updates or protocol upgrades

All these events have the potential to cause large price swings.

Advantages and disadvantages

Advantages:

• Unlimited profit potential if the price moves strongly
• You don’t need to predict the direction of the movement—just that it will happen
• Suitable for uncertain markets

Disadvantages:

• If the price remains stagnant, you lose the entire cost of the options ($200 in the example)
• The cost of buying two options can be high, especially in calm markets
• This strategy is complex and more suitable for experienced investors

What you need to know before applying

Straddle essentially is a way to bet on volatility, not on price direction. However, it is not a beginner strategy. You need to understand how options work, calculate the break-even point (the point of equilibrium), and manage risks carefully.

Remember, all trading strategies carry risks. Always invest only what you can afford to lose.