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training_data/curated/text/673fbd9c9c36acb6cf54fd83e0cc479559322d72f84f012f61fff0fef3e52c6a.txt

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+Cl,opter 20: The Sale of a Straddle 
+XYZ January 45 put, l; and 
+XYZ January 50 call, 3. 
+311 
+The January 50 call price is included because it will be part of the follow-up strategy. 
+Notice that this straddle has a considerable amount of time value premium remain­
+Ing in it, and thus would be rather expensive to buy back at the current time. 
+Suppose, however, that the straddle writer does not touch the January 45 straddle 
+tliat he is short, but instead buys the January 50 call for protection to the upside. 
+Since this call costs 3 points, he will now have a position with a total credit of 4 points. 
+(The straddle was originally sold for 7 points credit and he is now spending 3 points 
+for the call at 50.) This action of buying a call at a higher strike than the striking price 
+of the straddle has limited the potential loss to the upside, no matter how far the 
+stock might run up. If XYZ is anywhere above 50 at expiration, the put will expire 
+worthless and the writer will have to pay 5 points to close the call spread short 
+January 45, long January 50. This means that his maximum potential loss is 1 point 
+plus commissions if XYZ is anywhere above 50 at expiration. 
+In addition to being able to limit the upside loss, this type of follow-up action 
+still allows room for potential profits. If XYZ is anywhere between 41 and 49 at expi­
+ration - that is, less than 4 points away from the striking price of 45 - the writer will 
+he able to buy the straddle back for less than 4 points, thereby making a profit. 
+Thus, the straddle writer has both limited his potential losses to the upside and 
+also allowed room for profit potential should the underlying stock fall back in price 
+toward the original striking price of 45. Only severe price reversal, with the stock 
+falling back below 40, would cause a large loss to be taken. In fact, by the time the 
+stock could reverse its current strong upward momentum and fall all the way back to 
+40, a significant amount of time should have passed, thereby allowing the writer to 
+purchase the straddle back with only a relatively small amount of time premium left 
+in it. 
+This follow-up strategy has an effect on the margin requirement of the position. 
+When the calls are bought as protection to the upside, the writer has, for margin 
+purposes, a bearish spread in the calls and an uncovered put. The margin for this 
+position would normally be less than that required for the straddle that is 5 points 
+in-the-money. 
+A secondary move is available in this strategy. 
+Example: The stock continues to climb over the short term and the out-of-the­
+money put drops to a price of less than ½ point. The straddle writer might now 
+consider buying back the put, thereby leaving himself with a bear spread in the 
+calls. His net credit left in the position, after buying back the put at ½, would be