A straddle is an options strategy used if the trader has no clue where the market is going next. Straddles are typically utilized on volatile underlying stocks that could potentially make a large move in either direction. These potentially huge price swings are governed by external factors like news about the company or a pending interest rate decision by a central bank.
Straddles are initiated by opening a long call and put with the same strike price, expiration date and underlying stock. Once the stock begins to move significantly in one direction or a leg, the losing leg would be closed out at a loss and the profitable leg would be sold at a profit. When buying straddles, it is important to select an underlying stock that is guaranteed to move significantly. If the underlying stock remains unchanged until the straddle reached its expiration date, the trader takes a loss from both long put and call options which at this stage has expired worthless.