934 Part VI: Measuring and Trading Volatility 
provides the stock/put holder with an additional alternative of choosing to extend his 
position for a longer period of time by buying another put or possibly by just contin­
uing to hold the stock after the original put expires. 
Many equivalent positions have similar characteristics. The straddle purchase 
and the reverse hedge (short stock and buy calls) have similar profit and loss poten­
tial when measured in dollars. Their percentage risks are substantially different, how­
ever. In fact, as was shown in Chapter 20, another strategy is equivalent to both of 
these-buying stock and buying several puts. That is, buying a straddle is equivalent 
to buying 100 shares of stock and simultaneously buying two puts. The "buy stock and 
puts" strategy has a larger initial dollar investment, but the percentage risk is small­
er and the stockholder will receive any dividends paid by the common stock. 
In summary, the investor must know two things well: the strategy that he is con­
templating using, and his own attitude toward risk and reward. His own attitude 
represents suitability, a topic that is discussed more fully in the following section. 
Every strategy has risk. It would not be proper for an investor to pursue the best 
strategy in the universe (such a strategy does not exist, of course) if the risks of that 
strategy violated the investor's own level of financial objectives or accepted investment 
methodology. On the other hand, it is also not sufficient for the investor to merely feel 
that a strategy is suitable for his investment objectives. Suppose an investor felt that 
the T-bill/option strategy was suitable for him because of the profit and risk levels. 
Even if he understands the philosophies of option purchasing, it would not be proper 
for him to utilize the strategy unless he also understands the mechanics of buying 
Treasury bills and, more important, the concept of annualized risk. 
WHAT IS BEST FOR ME MIGHT NOT BE BEST FOR YOU 
It is impossible to classify any one strategy as the best one. The conservative investor 
would certainly not want to be an outright buyer of options. For him, covered call 
writing might be the best strategy. Not only would it accomplish his financial aims­
moderate profit potential with reduced risk-but it would be much more appealing 
to him psychologically. The conservative investor normally understands and accepts 
the risks of stock ownership. It is only a small step from that understanding to the 
covered call writing strategy. The aggressive investor would most likely not consider 
covered call writing to be the best strategy, because he would consider the profit 
potential too small. He is willing to take larger risks for the opportunity to make larg­
er profits. Outright option purchases might suit him best, and he would accept, by 
his aggressive stature, that he could lose nearly all his money in a relatively short time