Chapter 20: The Sale of a Straddle 
Option 
Jan 45 call 
Jan 45 put 
Total ESP 
Position 
short 8 
short 8 
Delta 
0.90 
-0.10 
313 
ESP 
short 720 (-8 x .9 x 100) 
long 80 (-8 x -. 1 x 1 00) 
short 640 shares 
Obviously, the position is quite short. Unless the trader were extremely bearish 
on XYZ, he should make an adjustment. The simplest adjustment would be to buy 
600 shares of XYZ. Another possibility would be to buy back 7 of the short January 
45 calls. Such a purchase would add a delta long of 630 shares to the position (7 x .9 
x 100). This would leave the position essentially neutral. As pointed out in the previ­
ous example, however, the strategist may not want to buy that option. If, instead, he 
decided to try to buy the January 50 call to hedge the short straddle, he would have 
to buy 10 of those to make the position neutral. He would buy that many because the 
delta of that January 50 is 0.60; a purchase of 10 would add a delta long of 600 shares 
to the position. 
Even though the purchase of 10 is theoretically correct, since one is only short 
8 straddles, he would probably buy only 8 January 50 calls as a practical matter. 
STARTING OUT WITH THE PROTECTION IN PLACE 
In certain cases, the straddle writer may be able to initially establish a position that 
has no risk in one direction: He can buy an out-of-the-money put or call at the same 
time the straddle is written. This accomplishes the same purposes as the follow-up 
action described in the last few paragraphs, but the protective option will cost less 
since it is out-of-the-money when it is purchased. There are, of course, both positive 
and negative aspects involved in adding an out-of-the-money long option to the strad­
dle write at the outset. 
Example: Given the following prices: 
XYZ, 45; 
XYZ January 45 straddle, 7; and 
XYZ January 50 call, 1 ½, 
the upside risk will be limited. If one writes the January 45 straddle for 7 points and 
buys the January 50 call for 1 ½ points, his overall credit will be 5½ points. He has no 
upside risk in this position, for if XYZ should rise and be over 50 at expiration, he will 
be able to close the position by buying back the call spread for 5 points. The put will 
expire worthless. The out-of-the-money call has eliminated any risk above 50 on the