Cl,apter 18: Buying Puts in Conjunction with Call Purchases 
XYZ common, 45: 
XYZ January 40 call, 7; 
XYZ January 40 put, l; and 
XYZ January 45 put, 3. 
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The straddle itself is now worth 8 points. The January 45 put price is included 
because it will be part of one of the follow-up strategies. What could the straddle 
buyer do at this time? First, he might do nothing, preferring to let the straddle run 
its course, at least for three months or so. Assuming that he is not content to sit tight, 
however, he might sell the call, taking his profit, and hope for the stock to then drop 
in price. This is an inferior course of action, since he would be cutting off potential 
large profits to the upside. 
In the older, over-the-counter option market, one might have tried a technique 
known as trading against the straddle. Since there was no secondary market for 
over-the-counter options, straddle buyers often traded the stock itself against the 
straddle that they owned. This type of follow-up action dictated that, if the stock 
rose enough to make the straddle profitable to the upside, one would sell short the 
underlying stock. This involved no extra risk, since if the stock continued up, the 
straddle holder could always exercise his call to cover the short sale for a profit. 
Conversely, if the underlying stock fell at the outset, making the straddle profitable 
to the downside, one would buy the underlying stock. Again, this involved no extra 
risk if the stock continued down, since the put could always be exercised to sell the 
stock at a profit. The idea was to be able to capitalize on large stock price reversals 
with the addition of the stock position to the straddle. This strategy worked best for 
the brokers, who made numerous commissions as the trader tried to gauge the 
whipsaws in the market. In the listed options market, the same strategic effect can 
be realized ( without as large a commission expense) by merely selling out the long 
call on an upward move, and using part of the proceeds to buy a second put similar 
to the one already held. On a downside move, one could sell out the long put for a 
profit and buy a second call similar to the one he already owns. In the example 
above, the call would be sold for 7 points and a second January 40 put purchased for 
1 point. This would allow the straddle buyer to recover his initial 6-point cost and 
would allow for large downside profit potential. This strategy is not recommended, 
however, since the straddle buyer is limiting his profit in the direction that the stock 
is moving. Once the stock has moved from 40 to 45, as in this example, it would be 
more reasonable to expect that it could continue up rather than experience a drop 
of more than 5 points.