312 Part Ill: Put Optian Strategies 
3½ points. Thus, if XYZ should reverse direction and be within 3½ points of the 
striking price - that is, anywhere below 48½ - at expiration, the position will pro­
duce a profit. In fact, if XYZ should be below 45 at expiration, the entire bear 
spread will expire worthless and the strategist will have made a 3½-point profit. 
Finally, this repurchase of the put releases the margin requirement for the naked 
put, and will generally free up excess funds so that a new straddle position can be 
established in another stock while the low-requirement bear spread remains in 
place. 
In summary, this type of follow-up action is broader in purpose than any of the 
simpler buy-back strategies described earlier. It will limit the writer's loss, but not 
prevent him from making a profit. Moreover, he may be able to release enough mar­
gin to be able to establish a new position in another stock by buying in the uncov­
ered puts at a fractional price. This would prevent him from tying up his money 
completely while waiting for the original straddle to reach its expiration date. The 
same type of strategy also works in a downward market. If the stock falls after the 
straddle is written, one can buy the put at the next lower strike to limit the down­
side risk, while still allowing for profit potential if the stock rises back to the striking 
price. 
EQUIVALENT STOCK POSITION FOLLOW-UP 
Since there are so many follow-up strategies that can be used with the short straddle, 
the one method that summarizes the situation best is again the equivalent stock posi­
tion (ESP). Recall that the ESP of an option position is the multiple of the quantity 
times the delta times the shares per option. The quantity is a negative number if it is 
referring to a short position. Using the above scenario, an example of the ESP 
method follows: 
Example: As before, assume that the straddle was originally sold for 7 points, but the 
stock rallied. The following prices and deltas exist: 
XYZ common, 50; 
XYZ Jan 45 call, 7; delta, .90; 
XYZ Jan 45 put, l; delta, - .10; and 
XYZ Jan 50 call, 3; delta, .60. 
Assume that 8 straddles were sold initially and that each option is for 100 shares of 
XYZ. The ESP of these 8 short straddles can then be computed: