282 Part Ill: Put Option Strategies 
if xyz is at 52 at expiration, the call will be worth 2 points and the put will be wort Ii 
8 points. Alternatively, if the stock is at 58 at expiration, the put will be worth 2 points 
and the call worth 8 points. Should xyz be above 60 at expiration, the combination's 
value will be equal to the call's value, since the put will expire worthless with XYZ 
above 60. The call would have to be worth more than 10 points in that case, since it 
has a striking price of 50. Similarly, if xyz were below 50 at expiration, the combi­
nation would be worth more than 10 points, since the put would be more than 10 
points in-the-money and the call would be worthless. 
The speculator has thus created a position in which he cannot lose money, 
because he paid only 7 points for the combination (3 points for the call and 4 points 
for the put). No matter what happens, the combination will be worth at least 10 
points at e:x-piration, and a 3-point profit is thus locked in. If xyz should continue to 
climb in price, the speculator could make more than 3 points of profit whenever xyz 
is above 60 at expiration. Moreover, if xyz should suddenly collapse in price, the 
speculator could make more than 3 points of profit if the stock was below 50 by expi­
ration. The reader must realize that such a position can never be created as an initial 
position. This desirable situation arose only because the call had built up a substan­
tial profit before the put was purchased. The similar strategy for the put buyer who 
might buy a call to protect his unrealized put profits was described in Chapter 16. 
STRADDLE BUYING 
A straddle purchase consists of buying both a put and a call with the same terms -
sarne underlying stock, striking price, and expiration date. The straddle purchase 
allows the buyer to make large potential profits if the stock moves far enough in 
either direction. The buyer has a predetermined maximum loss, equal to the amount 
of his initial investment. 
Example: The following prices exist: 
xyz common, 50; 
XYZ July 50 call, 3; and 
XYZ July 50 put, 2. 
If one purchased both the July 50 call and the July 50 put, he would be buying a 
straddle. This would cost 5 points plus commissions. The investment required to 
purchase a straddle is the net debit. If the underlying stock is exactly at 50 at expi­
ration, the buyer would lose all his investment, since both the put and the call would 
expire worthless. If the stock were above .55 at expiration, the call portion of the