288 Part Ill: Put Option Strategies 
A rrwre desirable sort off allow-up action would be one whereby the straddle 
buyer could retain much of the profit already built up without limiting further poten­
tial profits if the stock continues to run. In the example above, the straddle buyer 
could use the January 45 put - the one at the higher price - for this purpose. 
Example: Suppose that when the stock got to 45, he sold the put that he owned, the 
January 40, for 1 point, and simultaneously bought the January 45 put for 3 points. 
This transaction would cost 2 points, and would leave him in the following position: 
Long 1 January 40 call C b· d t 8 . t - om me cos : porn s Long 1 January 45 put 
He now owns a combination at a cost of 8 points. However, no matter where the 
underlying stock is at expiration, this combination will be worth at least 5 points, 
since the put has a striking price 5 points higher than the call's striking price. In fact, 
if the stock is above 45 at expiration or is below 40 at expiration, the straddle will be 
worth more than 5 points. This follow-up action has not limited the potential profits. 
If the stock continues to rise in price, the call will become more and more valuable. 
On the other hand, if the stock reverses and falls dramatically, the put will become 
quite valuable. In either case, the opportunity for large potential profits remains. 
Moreover, the investor has improved his risk exposure. The most that the new posi­
tion can lose at expiration is 3 points, since the combination cost 8 points originally, 
and can be sold for 5 points at worst. 
To summarize, if the underlying stock moves up to the ne:t"t strike, the straddle 
buyer should consider rolling his put up, selling the one that he is long and buying 
the one at the next higher striking price. Conversely, if the stock starts out with a 
downward move, he should consider rolling the call down, selling the one that he is 
long and buying the one at the next lower strike. In either case, he reduces his risk 
exposure without limiting his profit potential - exactly the type of follow-up result 
that the straddle buyer should be aiming for. 
BUYING A STRANGLE 
A strangle is a position that consists of both a put and a call, which generally have the 
same expiration date, but different striking prices. The fallowing example depicts a 
strangle. 
Example: One might buy a strangle consisting of an XYZ January 45 put and an XYZ 
January 50 call. Buying such a strangle is quite similar to buying a straddle, although