286 Part Ill: Put Option Strategies 
never move much one way or the other, but that its net movement over the time peri­
od will generally be small. 
Example: If XYZ is currently at 50, one might say that its chances of being over .5.5 
at the end of 90 days are fairly small, perhaps 30%. This may even be supported by 
mathematical analysis based on the volatility of the underlying stock. This does not 
imply, however, that the stock has only a 30% chance of ever reaching 55 during the 
90-day period. Rather, it implies that it has only a 30% chance of being over 55 at the 
end of the 90-day period. These are two distinctly different events, with different 
probabilities of occurrence. Even though the probability of being over 55 at the end 
of 90 days might be only 30%, the probability of ever being over 55 during the 90-
day period could be amazingly high, perhaps as high as 80%. It is important for the 
straddle buyer to understand the differences between these events occurring, for he 
might often be able to take follow-up action to improve his position. 
Many times, after a straddle is bought, the underlying stock will begin to move 
strongly, making it appear that the straddle is immediately going to become prof­
itable. However, just as things are going well, the stock reverses and begins to change 
direction, perhaps so quickly that it would now appear that the straddle will become 
profitable on the other side. These volatile stock movements often result in little net 
change, however, and at expiration the straddle buyer may have a loss. One might 
think that he would take profits on the call side when they became available in a 
quick upward movement, and then hope for a downward reversal so that he could 
take profits on the put side as well. Taking small profits, however, is a poor strategy. 
Straddle buying has limited losses and potentially unlimited profits. One might have 
to suffer through a substantial number of small losses before hitting a big winner, but 
the magnitude of the gain on that one large stock movement can offset many small 
losses. By taking small profits, the straddle buyer is immediately cutting off his 
chances for a substantial gain; that is why it is a poor strategy to limit the profits. 
This is one of those statements that sounds easier in theory than it is in practice. 
It is emotionally distressing to watch the straddle gain 2 or 3 points in a short time 
period, only to lose that and more when the stock fails to follow through. By using a 
different example, it is possible to demonstrate the types of follow-up action that the 
straddle buyer might take. 
Example: One had initially bought an XYZ January 40 straddle for 6 points when the 
stock was 40. After a fairly short time, the stock jumps up to 45 and the following 
prices exist: