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training_data/curated/text/6c7301fe971c2e6a7f6e11830742235dc0b761b10101f83c75777328338b0b66.txt

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+Chapter 20: The Sale of a Straddle 
+Option 
+Jan 45 call 
+Jan 45 put 
+Total ESP 
+Position 
+short 8 
+short 8 
+Delta 
+0.90 
+-0.10 
+313 
+ESP 
+short 720 (-8 x .9 x 100) 
+long 80 (-8 x -. 1 x 1 00) 
+short 640 shares 
+Obviously, the position is quite short. Unless the trader were extremely bearish 
+on XYZ, he should make an adjustment. The simplest adjustment would be to buy 
+600 shares of XYZ. Another possibility would be to buy back 7 of the short January 
+45 calls. Such a purchase would add a delta long of 630 shares to the position (7 x .9 
+x 100). This would leave the position essentially neutral. As pointed out in the previ­
+ous example, however, the strategist may not want to buy that option. If, instead, he 
+decided to try to buy the January 50 call to hedge the short straddle, he would have 
+to buy 10 of those to make the position neutral. He would buy that many because the 
+delta of that January 50 is 0.60; a purchase of 10 would add a delta long of 600 shares 
+to the position. 
+Even though the purchase of 10 is theoretically correct, since one is only short 
+8 straddles, he would probably buy only 8 January 50 calls as a practical matter. 
+STARTING OUT WITH THE PROTECTION IN PLACE 
+In certain cases, the straddle writer may be able to initially establish a position that 
+has no risk in one direction: He can buy an out-of-the-money put or call at the same 
+time the straddle is written. This accomplishes the same purposes as the follow-up 
+action described in the last few paragraphs, but the protective option will cost less 
+since it is out-of-the-money when it is purchased. There are, of course, both positive 
+and negative aspects involved in adding an out-of-the-money long option to the strad­
+dle write at the outset. 
+Example: Given the following prices: 
+XYZ, 45; 
+XYZ January 45 straddle, 7; and 
+XYZ January 50 call, 1 ½, 
+the upside risk will be limited. If one writes the January 45 straddle for 7 points and 
+buys the January 50 call for 1 ½ points, his overall credit will be 5½ points. He has no 
+upside risk in this position, for if XYZ should rise and be over 50 at expiration, he will 
+be able to close the position by buying back the call spread for 5 points. The put will 
+expire worthless. The out-of-the-money call has eliminated any risk above 50 on the