Similar to a straddle but using out-of-the-money options (lower cost). You buy an OTM call and an OTM put. Cheaper than a straddle but requires a larger move to profit.
Unlimited on upside, substantial on downside
Total premium paid (less than straddle)
Call strike + total premium OR Put strike - total premium
Long 1 OTM Call + Long 1 OTM Put (different strikes, same expiry)
Unlimited profit potential. Risk limited to total premium. Requires larger move than straddle to profit.
When you expect a big move but are unsure of direction. When you want a cheaper alternative to a straddle. Before major catalyst events.