Gapter 16: Put Option Buying 265 
points. For example, if XYZ is at 46 at expiration, the put will be worth 4 and the call 
worth l; or if XYZ is at 48, the put will be worth 2 and the call worth 3. If the stock 
is above 50 or below 45 at expiration, the combination will be worth more than 5 
points. Thus, the trader has no risk in this combination, since he has paid 5 points for 
it and will be able to sell it for at least 5 points at expiration. In fact, if the underly­
ing stock continues to drop, the put will become more valuable and he could build 
up substantial profits. Moreover, if the underlying stock should reverse direction and 
climb substantially, he could still profit, because the call will then become valuable. 
This tactic is the best one to use if the underlying stock does not stabilize near 45, 
but instead makes a relatively dramatic move either up or down by expiration. The 
strategy of simultaneously owning both a put and a call is discussed in much greater 
detail in Chapter 23. It is introduced here merely for the purposes of the put buyer 
wanting to obtain protection of his unrealized profits. 
Each of these five strategies may work out to be the best one under a different 
set of circumstances. The ultimate result of each tactic is dependent on the direction 
that XYZ moves in the future. As was the case with call options, the spread tactic 
never turns out to be the worst tactic, although it is the best one only if the underly­
ing stock stabilizes. Tables 16-4 and 16-5 summarize the results the speculator could 
expect from invoking each of these five tactics. The tactics are: 
1. Liquidate - sell the long put for a profit and do not reinvest. 
2. Do nothing - continue to hold the long put. 
3. "Roll down" - sell the long put, pocket the initial investment, and invest the 
remaining proceeds in out-of-the-money puts at a lower strike. 
4. "Spread" - create a spread by selling the out-of-the-money put against the put 
already held. 
5. "Combine" create a combination by buying a call at a lower strike while con­
tinuing to hold the put. 
TABLE 16-4. 
Comparison of the five tactics. 
By expiration, if XYZ ... 
Continues to fall dramatically 
Falls moderately further 
Remains relatively unchanged 
Rises moderately 
Rises substantially 
the best strategy was ... 
"Roll down" 
Do nothing 
Spread 
Liquidate 
Combine 
and the worst 
strategy was ... 
Liquidate 
Combine 
Combine or "roll down" 
"Roll down" or do nothing 
Do nothing