The turmoil in the markets has left plenty of investors scratching their heads.
Tariff announcements have seen stocks make massive swings – often in the same day. Recall the 8.5% intraday swing in the S&P 500 earlier this month. Then it later shot 9.5% higher in a single day.
On top of that, President Trump’s hostility toward the Federal Reserve and tariffs from China add to all the uncertainty.
So it’s even tougher than usual to pick a stock’s direction. But a misstep can tear a hole in your account.
That’s why today, I want to share an option strategy that can help you in volatile conditions…
A Leg in Both Camps
If you’re confident of the direction a stock will take, you have a choice… You buy a call option if the stock is going to rally or a put option if it’s going to fall.
But what if you’re not sure what direction it will take?
That’s where a “straddle” fits into the picture. A straddle is where you buy a call and put option at the same strike price. (You must also choose the same expiration.)
Both strike prices should be at the current stock price – or as close as possible. In options speak, that means the options are at-the-money (ATM).
At first glance, a straddle might seem like the perfect strategy. One of the option legs stands to gain no matter what direction the stock takes.
But generating a profit is not as easy as it seems…
Recouping the Cost
The reason for this is that you are paying two option premiums. You need to recoup the cost of buying both options before you can make a profit on the trade.
To see what I mean, let’s check an example using Caterpillar (CAT)…
Caterpillar (CAT)
Source: e-Signal
CAT is consolidating around $300. You think it is gearing up for a big move but aren’t confident about whether it’s going up or down. So you decide to buy a straddle.
You would buy a $300 call option while also buying a $300 put option.
In our example, we buy both options for $20 each ($40 total). We need CAT to move in either direction by $40 to recoup that cost.
So CAT has to trade above $340 or below $260 before we turn a profit. As the chart shows, that’s quite a substantive move. It might not happen before the option expires – or before time decay eats away at your options’ value.
That’s why you need to consider another essential ingredient of the strategy… volatility.
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The Key Ingredient
Volatility is a key ingredient with straddles… and options more broadly. It plays a massive part in how options are priced.
The more the underlying stock moves about, the more that increased volatility gets priced into the option. Because a straddle involves buying two options, you’re dealing with two lots of volatility.
The goal is to buy when volatility is low but increasing. And you want to sell when volatility is high.
Vitally, rising volatility flows into the value of both the call and put options.
So in this CAT example, if it rallies strongly or falls heavily, the combined value of both options could increase to $50, $60, or higher due to the volatility increase alone.
This means that you could close out the trade for a healthy profit no matter what direction CAT takes – and potentially long before the options expire.
This is what many option traders aim to do rather than riding the straddle through expiration. They want to avoid time decay. And they want to take advantage of rising volatility.
Of course, with President Trump in the White House, you can be sure there are going to be more volatile times ahead.
That makes a straddle a handy strategy to have in your toolbox in times like these.
Happy Trading,
Larry Benedict
Editor, Trading With Larry Benedict
P.S. Straddles are a useful strategy for these moments… but that’s not my only recommendation for profiting in today’s choppy market.
If you want to learn more about my “chaos trades” strategy, there’s a limited amount of time to watch my broadcast explaining how it works. It’s one way I’ve been able to hand my readers consistent double- and triple-digit gains in 2025. While the market is down, we’ve been making money.
To catch the replay before it disappears, simply go right here.