Straddle
A straddle involves simultaneously holding a call and a put option at the same strike price and expiry. A long straddle on Nifty profits from a large move in either direction, while a short straddle profits if the underlying remains near the strike through expiry.
The long straddle is constructed by purchasing both an ATM call and an ATM put at the same strike and expiry. The total cost is the sum of both premiums, and this combined premium represents the break-even range: the underlying must move above the upper break-even (strike plus combined premium) or below the lower break-even (strike minus combined premium) for the trade to be profitable at expiry.
On NSE, Nifty and Bank Nifty ATM straddles were frequently purchased ahead of scheduled events such as the Union Budget, RBI policy decisions, and election result days. Participants who anticipated significant volatility but were uncertain about direction used long straddles to position for a large move without committing to a directional view. The risk was the total premium paid if the market moved less than anticipated.
The short straddle is the mirror image: the writer collects the combined premium and profits if the underlying remains within the break-even range. Short straddle writers on Bank Nifty weekly options collected meaningful premium but were exposed to sharp losses if the index made an outsized move. The strategy is high-risk if not actively managed, as the negative gamma exposure near ATM can cause rapid mark-to-market deterioration during large intraday moves.
IV level is critical to straddle strategy selection. Purchasing a straddle when implied volatility is high results in paying elevated premiums, requiring an even larger move to break even. Purchasing a straddle when IV is low means the premium is more modest, but the underlying may not exhibit the requisite volatility to generate profit either. A post-event IV crush is a common cause of straddle buyer losses even when the anticipated move materialises.
A misconception is that the long straddle is a no-lose strategy because it profits from moves in either direction. The straddle buyer can lose the entire combined premium if the underlying stays flat or moves only modestly. The strategy requires both a significant move and sufficient magnitude to overcome the combined premium paid.