Cl,opter 20: The Sale of a Straddle 
XYZ January 45 put, l; and 
XYZ January 50 call, 3. 
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The January 50 call price is included because it will be part of the follow-up strategy. 
Notice that this straddle has a considerable amount of time value premium remain­
Ing in it, and thus would be rather expensive to buy back at the current time. 
Suppose, however, that the straddle writer does not touch the January 45 straddle 
tliat he is short, but instead buys the January 50 call for protection to the upside. 
Since this call costs 3 points, he will now have a position with a total credit of 4 points. 
(The straddle was originally sold for 7 points credit and he is now spending 3 points 
for the call at 50.) This action of buying a call at a higher strike than the striking price 
of the straddle has limited the potential loss to the upside, no matter how far the 
stock might run up. If XYZ is anywhere above 50 at expiration, the put will expire 
worthless and the writer will have to pay 5 points to close the call spread short 
January 45, long January 50. This means that his maximum potential loss is 1 point 
plus commissions if XYZ is anywhere above 50 at expiration. 
In addition to being able to limit the upside loss, this type of follow-up action 
still allows room for potential profits. If XYZ is anywhere between 41 and 49 at expi­
ration - that is, less than 4 points away from the striking price of 45 - the writer will 
he able to buy the straddle back for less than 4 points, thereby making a profit. 
Thus, the straddle writer has both limited his potential losses to the upside and 
also allowed room for profit potential should the underlying stock fall back in price 
toward the original striking price of 45. Only severe price reversal, with the stock 
falling back below 40, would cause a large loss to be taken. In fact, by the time the 
stock could reverse its current strong upward momentum and fall all the way back to 
40, a significant amount of time should have passed, thereby allowing the writer to 
purchase the straddle back with only a relatively small amount of time premium left 
in it. 
This follow-up strategy has an effect on the margin requirement of the position. 
When the calls are bought as protection to the upside, the writer has, for margin 
purposes, a bearish spread in the calls and an uncovered put. The margin for this 
position would normally be less than that required for the straddle that is 5 points 
in-the-money. 
A secondary move is available in this strategy. 
Example: The stock continues to climb over the short term and the out-of-the­
money put drops to a price of less than ½ point. The straddle writer might now 
consider buying back the put, thereby leaving himself with a bear spread in the 
calls. His net credit left in the position, after buying back the put at ½, would be