Buy a call AND a put at the same strike. The bet is not on direction but on magnitude: the position wins if the stock moves far enough, either way.
1 contract = 100 shares. All values are per share unless otherwise noted.
A dated event with an uncertain outcome but a probably strong reaction. The two legs cover both outcomes.
A quiet market, or already elevated implied volatility: both premiums are paid up front and decay together. A directionless position is not a riskless one.
Two legs BOUGHT, same strike, same expiry: • a call, carrying the upside; • a put, carrying the downside. Total outlay is the sum of both premiums. That is the maximum loss, reached exactly at the strike. There are two breakevens: strike + total premium, and strike − total premium. Between them the position loses. Beyond them it gains, with no cap on the upside.
Stock at $100. Buy the 100 call at $4 and the 100 put at $4. Outlay: $8 × 100 = $800. • Stock at $100 → both expire worthless. Maximum loss = $800. • Stock at $92 or $108 → breakevens. P&L = 0. • Stock at $85 → gain = (15 − 8) × 100 = $700. • Stock at $130 → gain = (30 − 8) × 100 = $2,200. A 7% move is not enough here: it takes more than 8%, either way, just to break even.
The central trap has a name: implied volatility crush. Ahead of an expected event, premiums already price in a strong reaction. Once the event passes, uncertainty disappears and implied volatility drops — both legs lose value at once. So a stock can move in the hoped-for direction and the position still lose: the realised move was smaller than the one already paid for in the premiums.
Options are high-risk derivative products. Losses can exceed the capital initially committed (particularly for uncovered short positions). Polaris provides educational content only — this is not investment advice. Consult a registered advisor (AMF) before any decision and make sure you have the appropriate level of approval from your broker.