A straddle is one call option and one put option on the same underlying, with the same strike price and the same expiry. The ATM straddle uses the strike closest to the current price (at the money).
Its price is simply call premium + put premium. That number is the market's own estimate of how far the price could move before expiry: if NIFTY is at 24,500 and the 24,500 straddle costs ₹200, option sellers are being paid for a move of roughly ±200 points.
Buying and selling a straddle
- Long straddle (buy both): profits if the price moves a lot in either direction, by more than the premium paid. Loses if the market stays still.
- Short straddle (sell both): collects the premium and profits if the price stays near the strike. The risk is unlimited on a big move.
Why the straddle falls during the day
Options lose time value every day (this is called theta decay), and the loss speeds up close to expiry. On a quiet day the straddle price drifts lower; a sharp rise in the straddle usually means a big move or a jump in implied volatility.
Traders watch the straddle chart with its VWAP: a straddle trading below its VWAP often means sellers are in control for the day.