Chapter 20: The Sale of a Straddle 319 
deltas of the options involved in his position to determine a neutral ratio. The strad­
dle writer can do the same thing, of course. It was stated that the difference between 
a call's delta and a put' s delta is approximately one. Using the same prices as in the 
previous straddle writing example, and assuming the call's delta to be .60, a neutral 
ratio can be determined. 
Prices 
XYZ common: 
XYZ January 45 call: 
XYZ January 45 put: 
45 
4 
3 
Deltas 
.60 
-.40 (.60 - 1) 
The put has a negative delta, to indicate that the put and the underlying stock are 
inversely related. A neutral ratio is determined by dividing the call's delta by the put's 
delta and ignoring the minus sign. The resultant ratio - 1.5:1 (.60/.40) in this case -
is the ratio of puts to sell for each call that is sold. Thus, one should sell 3 puts and 
sell 2 calls to establish a neutral position. The reader may wonder if the assumption 
that an at-the-money call has a delta of .60 is a fair one. It generally is, although very 
long-term calls will have higher at-the-money deltas, and very short-term calls will 
have deltas near .50. Consequently, a 3:2 ratio is often a neutral one. When neutral 
ratios were discussed with respect to ratio writing, it was mentioned that selling 5 
calls and buying 300 shares of stock often results in neutral ratio. The reader should 
note that a straddle constructed by selling 3 puts and 2 calls is equivalent to the ratio 
write in which one sells 5 calls and buys 300 shares of stock. 
If a straddle writer is going to use the deltas to determine his neutral ratio, he 
should compute each one at the time of his initial investment, of course, rather than 
relying on a generality such as that 3 puts and 2 calls often result in a neutral posi­
tion. The deltas can be used as a follow-up action, by adjusting the ratio to remain 
neutral after a move by the underlying stock. 
AVOID EXCESS TRADING 
In any of the straddle and strangle writing strategies described above, too much fol­
low-up action can be detrimental because of the commission costs involved. Thus, 
although it is important to take protective action, the straddle writer should plan in 
advance to make the minimum number of strategic moves to protect himself. That is 
why buying protection is often useful; not only does it limit the risk in the direction 
that the stock is moving, but it also involves only one additional option commission. 
In fact, if it is feasible, buying protection at the outset is often a better strategy than 
protecting as a secondary action.