348 Part Ill: Put Option Strategies 
In summary, this is a reasonable strategy if one operates it over a period of time 
long enough to encompass several market cycles. The strategist must be careful not 
to place a large portion of his trading capital in the strategy, however, since even 
though the losses are limited, they still represent his entire net investment. A varia­
tion of this strategy, whereby one sells more options than he buys, is described in the 
next chapter. 
THE CALENDAR STRADDLE 
Another strategy that combines calendar spreads on both put and call options can be 
constructed by selling a near-term straddle and simultaneously purchasing a longer­
term straddle. Since the time value premium of the near-term straddle will decrease 
more rapidly than that of the longer-term straddle, one could make profits on a lim­
ited investment. This strategy is somewhat inferior to the one described in the pre­
vious section, but it is interesting enough to examine. 
Example: Suppose that three months before January expiration, the following prices 
exist: 
XYZ common: 40 
January 40 straddle: 5 April 40 straddle: 7 
A calendar spread of the straddles could be established by selling the January 40 
straddle and simultaneously buying the April 40 straddle. This would involve a cost 
of 2 points, or the debit of the transaction, plus commissions. 
The risk is limited to the amount of this debit up until {he time the near-term 
straddle expires. That is, even if XYZ moves up in price by a substantial amount or 
declines in price by a substantial amount, the worst that can happen is that the dif­
ference between the straddle prices shrinks to zero. This could cause one to lose an 
amount equal to his original debit, plus commissions. This limit on the risk applies 
only until the near-term options expire. If the strategist decides to buy back the near­
term straddle and continue to hold the longer-term one, his risk then increases by the 
cost of buying back the near-term straddle. 
Example: XYZ is at 43 when the January options expire. The January 40 call can now 
be bought back for 3 points. The put expires worthless; so the whole straddle was 
closed out for 3 points. The April 40 straddle might be selling for 6 points at that 
time. If the strategist wants to hold on to the April straddle, in hopes that the stock 
might experience a large price swing, he is free to do so after buying back the January