Chapter 40: Advanced Concepts 
FIGURE 40-9. 
XYZ straddle buy. 
Cl) 
8000 
7000 
6000 
5000 
4000 
~ 3000 
~ 2000 
! 1000 
01------------------------
-1000 
-2000 
-3000 At January Expiration 
Stock Price 
871 
some of the other risk measurements are considered. Consequently, one cannot 
blithely go around establishing delta neutral positions and ignoring them, for 
they may have significant market risk as certain factors change. 
For example, it is obvious to the naked eye that the two positions described in 
the previous section - the ratio spread and the long straddle - are not alike at all, 
but both are delta neutral. If one incorporates the usage of some of the other risk 
measurements into his position, he will be able to quantify the differences between 
"neutral" strategies. The sale of a straddle will be used to examine how these vari­
ous factors work. 
Positions with naked options in them have negative position gamma. This 
means that as the underlying security moves, the position will acquire traits opposite 
to that movement: If the security rises, the position becomes short; if it falls, the posi­
tion becomes long. This description generally fits any position with naked options, 
such as a ratio spread, a naked straddle, or a ratio write. 
Example: XYZ is at 88. There are three months remaining until July expiration, and 
the volatility of XYZ is 30%. Suppose 100 July 90 straddles are sold for 10 points -
the put and the call each selling for 5. Initially, this position is nearly delta neutral, as