O.,,ter 18: Buying Puts in Conjunction with Call Purchases 289 
there are some differences, as the following discussion will demonstrate. Suppose the 
following prices exist: 
XYZ common, 47; 
XYZ January 45 put, 2; and 
XYZ January 50 call, 2. 
In this example, both options are out-of-the-money when purchased. This, again, is 
the most normal application of the strangle purchase. If XYZ is still between 45 and 
50 at January expiration, both options will expire worthless and the strangle buyer 
will lose his entire investment. This investment - $400 in the example - is generally 
smaller than that required to buy a straddle on XYZ. If XYZ moves in either direc­
tion, rising above 50 or falling below 45, the strangle will have some value at expira­
tion. In this example, ifXYZ is above 54 at expiration, the call will be worth more than 
4 points (the put will expire worthless) and the buyer will make a profit. In a similar 
manner, if XYZ is below 41 at expiration, the put will have a value greater than 4 
points and the buyer would make a profit in that case as well. The potential profits 
are quite large if the underlying stock should nwve a great deal before the options 
expire. Table 18-2 and Figure 18-2 depict the potential profits or losses from this 
position at January expiration. The maximum loss is possible over a much wider range 
than that of a straddle. The straddle achieves its maximum loss only if the stock is 
exactly at the striking price of the options at expiration. However, the strangle has its 
maximum loss anywhere between the two strikes at expiration. The actual amount of 
the loss is smaller for the strangle, and that is a compensating factor. The potential 
profits are large for both strategies. 
The example above is one in which both options are out-of-the money. It is also 
possible to construct a very similar position by utilizing in-the-money options. 
Example: With XYZ at 47 as before, the in-the-money options might have the fol­
lowing prices: XYZ January 45 call, 4; and XYZ January 50 put, 4. If one purchased 
this in-the-rrwney strangle, he would pay a total cost of 8 points. However, the value 
of this strangle will always be at least 5 points, since the striking price of the put is 5 
points higher than that of the call. The reader has seen this sort of position before, 
when protective follow-up strategies for straddle buying and for call or put buying 
were described. Because the strangle will always be worth at least 5 points, the most 
that the in-the-money strangle buyer can lose is 3 points in this example. His poten­
tial profits are still unlimited should the underlying stock move a large distance. 
Thus, even though it requires a larger initial investment, the in-the-rrwney strangle 
may often be a superior strategy to the out-of the-rrwney strangle, from a buyer's