A call and a put at the same strike and expiry, bought together. The position starts close to delta-neutral and pays on a large move in either direction, which makes it the instrument for an event whose outcome is unknown but whose size is not. Both legs carry full time value, so you pay twice and only one of them can finish in the money — the move has to clear the pair before anything is earned. Implied volatility almost always falls once the uncertainty resolves, which can turn a correct call on direction into a loss. Price both legs here and read the two breakevens sitting either side of spot.
Both legs share one strike and one expiry, so the ticket is simpler than it looks — the cost comes from paying full premium on two at-the-money options, not from any complexity in the order. Because the position prices almost entirely off implied volatility rather than direction, compare the at-the-money implied volatility here against where it has recently traded before paying up into an already-elevated level. Exiting before an expected volatility drop, rather than holding through it, is the more common way this is actually traded.
Size by the combined debit, and treat it as the full amount at risk rather than as two half-sized positions, since only one leg can ever pay and the other is a near-certain loss by construction. Implied volatility on the specific expiry chosen matters more than the underlying's general volatility level — a straddle priced into an earnings week embeds an event premium a straddle on an ordinary week does not, and the two are not comparable at face value. Many traders close before the event resolves if implied volatility has run up sharply, taking the vega gain rather than holding through the outcome.
Common mistake. The common mistake is buying it into a well-telegraphed event where implied volatility is already pricing the expected move, so being right about the event still loses if the move is merely average.
| # | Action | Instrument | Strike |
|---|---|---|---|
| 1 | Buy | Call | 340 |
| 2 | Buy | Put | 340 |
Computed from the same strikes and net premium as the worked example above — not a simulation, the closed-form payoff evaluated at each price.
| TSLA at expiry | P&L |
|---|---|
| 280 | $2530.00 |
| 310 | -$470.00 |
| 340 | -$3470.00 |
| 370 | -$470.00 |
| 400 | $2530.00 |
| 430 | $5530.00 |
| Strategy | Market view | Opened for | Legs vs. this one |
|---|---|---|---|
| Long Strangle | Volatility — direction-agnostic | Debit | same |
| Iron Butterfly | Neutral — pinned | Credit | +1 |
| Long Call | Bullish — directional | Debit | -1 |
| Long Put | Bearish — directional, or a hedge | Debit | -1 |