Chapter 20: The Sale of a Straddle 315 
STRANGLE (COMBINATION) WRITING 
Recall that a strangle is any position involving both puts and calls, when there is some 
difference in the terms of the options. Commonly, the puts and calls will have the 
same expiration date but differing striking prices. A strangle write is usually estab­
lished by selling both an out-of-the-money put and an out-of-the-money call with the 
stock approximately centered between the two striking prices. In this way, the naked 
option writer can remain neutral on the outlook for the underlying stock, even when 
the stock is not near a striking price. 
This strategy is quite similar to straddle writing, except that the strangle 
writer makes his maximum profit over a much wider range than the straddle 
writer does. In this or any other naked writing strategy, the most money that the 
strategist can make is the amount of the premium received. The straddle writer 
has only a minute chance of making a profit of the entire straddle premium, since 
the stock would have to be exactly at the striking price at expiration in order for 
both the written put and call to expire worthless. The strangle writer will make his 
maximum profit potential if the stock is anywhere between the two strikes at expi­
ration, because both options will expire worthless in that case. This strategy is 
equivalent to the variable ratio write described previously in Chapter 6 on ratio 
call writing. 
Example: Given the following prices: 
XYZ common, 65; 
XYZ January 70 call, 4; and 
XYZ January 60 put, 3, 
a strangle write would be established by selling the January 70 call and the January 
60 put. IfXYZ is anywhere between 60 and 70 at January expiration, both options will 
expire worthless and the strangle writer will make a profit of 7 points, the amount of 
the original credit taken in. If XYZ is above 70 at expiration, the strategist will have 
to pay something to buy back the call. For example, if XYZ is at 77 at expiration, the 
January 70 call will have to be bought back for 7 points, thereby creating a break-even 
situation. To the downside, if XYZ were at 53 at expiration, the January 60 put would 
have to be bought back for 7 points, thereby defining that as the downside break­
even point. Table 20-3 and Figure 20-3 outline the potential results of this strangle 
write. The profit range in this example is quite wide, extending from 53 on the down­
side to 77 on the upside. With the stock presently at 65, this is a relatively neutral 
position.