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+ter 18: Buying Puts in Conjunction with Call Purchases 
+IILECTING A STRADDLE BUY 
+285 
+In theory, one could find the best straddle purchases by applying the analyses for best 
+call purchases and best put purchases simultaneously. Then, if both the puts and calls 
+on a particular stock showed attractive opportunity, the straddle could be bought. 
+The straddle should be viewed as an entire position. A similar sort of analysis to that 
+proposed for either put or call purchases could be used for straddles as well. First, 
+one would assume the stock would move up or down in accordance with its volatili­
+ty within a fixed time period, such as 60 or 90 days. Then, the prices of both the put 
+and the call could be predicted for this stock movement. The straddles that off er the 
+best reward opportunity under this analysis would be the most attractive ones to buy. 
+To demonstrate this sort of analysis, the previous example can be utilized again. 
+Example: XYZ is at 50 and the July 50 call is selling for 3 while the July 50 put is sell­
+ing for 2 points. If the strategist is able to determine that XYZ has a 25% chance of 
+being above 54 in 90 days and also has a 25% chance of being below 46 in 90 days, 
+he can then predict the option prices. A rigorous method for determining what per­
+centage chance a stock has of making a predetermined price movement is presented 
+in Chapter 28 on mathematical applications. For now, a general procedure of analy­
+sis is more important than its actual implementation. If XYZ were at 54 in 90 days, it 
+might be reasonable to assume that the call would be worth 5½ and the put would 
+be worth 1 point. The straddle would therefore be worth 6½ points. Similarly, if the 
+stock were at 46 in 90 days, the put might be worth 4½ points, and the call worth 1 
+point, making the entire straddle worth 5½ points. It is fairly common for the strad­
+dle to be higher-priced when it is a fixed distance in-the-money on the call side (such 
+as 4 points) than when it is in-the-money on the put side by that same distance. In 
+this example, the strategist has now determined that there is a 25% chance that the 
+straddle will be worth 6½ points in 90 days on an upside movement, and there is a 
+25% chance that the straddle will be worth 5½ points on a downside movement. The 
+average price of these two expectations is 6 points. Since the straddle is currently sell­
+ing for 5 points, this would represent a 20% profit. If all potential straddles are 
+ranked in the same manner - allowing for a 25% chance of upside and downside 
+movement by each underlying stock - the straddle buyer will have a common basis 
+for comparing various straddle opportunities. 
+FOLLOW-UP ACTION 
+It has been mentioned frequently that there is a good chance that a stock will remain 
+relatively unchanged over a short time period. This does not mean that the stock will