352 Part Ill: Put Option Strategies 
not attempt to leg out of a spread, but this is an exception to that rule, since one owns 
a long combination and therefore is protected; he is not subjecting himself to large 
risks by attempting to "leg out" of the straddle he has written. 
Example: XYZ rallies before January expiration and the January 40 put drops to a 
price of ½ during the rally. Even though there is time remaining until expiration, the 
strategist might decide to buy back the put at ½. This could potentially increase his 
overall risk by ½ point if the stock continues to rise. However, if the stock then 
reversed itself and fell, he could attempt to buy the call back at 2½ points or less. In 
this manner, he would still achieve his objective of buying the short-term straddle 
back for 3 points or less. In fact, he might be able to close both sides of the straddle 
well before near-term expiration if the underlying stock first moves quickly in one 
direction and then reverses direction by a large amount. 
The maximum risk and the optimum potential objectives have been described, 
but interim results might also be considered in this strategy. 
Example: XYZ is at 44 at January expiration. The January 40 straddle must be bought 
back for 4 points. This means that the long combination will not be owned free, but 
will have a cost of I point plus commissions. The strategist must decide at this time 
if he wants to hold on to the April options or if he wants to sell them, possibly pro­
ducing a small overall profit on the entire position. There is no ironclad rule in this 
type of situation. If the decision is made to hold on to the longer-term options, the 
strategist realizes that he has assumed additional risk by doing so. Nevertheless, he 
may decide that it is worth owning the long combination at a relatively low cost. The 
cost in this example would be I point plus commissions, since he paid 4 points to buy 
back the straddle after only taking in a 3-point credit initially. The more ex.pensive the 
buy-back of the near-term straddle is, the more the strategist should be readily will­
ing to sell his long options at the same time. For example, if XYZ were at 48 at 
January expiration and the January 40 straddle had to be bought back for 8 points, 
there should be no question that he should simultaneously sell his April options as 
well. The most difficult decisions come when the stock is just outside the optimum 
buy-back area at near-term expiration. In this example, the strategist would have a 
fairly difficult decision if XYZ were in the 44 to 45 area or in the 35 to 36 area at 
January expiration. 
The reader may recall that, in Chapter 14 on diagonalizing a spread, it was men­
tioned that one is sometimes able to own a call free by entering into a diagonal cred­
it spread. A diagonal bear spread was given as an example. The same thing happens 
to be true of a diagonal bullish put spread, since that is a credit spread as well. The