Chapter 20: The Sale of a Straddle 317 
to limit his losses. This can, as has been shown previously, entail a purchase price 
involving excess amounts of time value premium, thereby generating a significant 
loss. 
The only other alternative that is available to the strangle writer ( outside of 
attempting to trade out of the position) is to convert the position into a straddle if the 
stock reaches either break-even point. 
Example: IfXYZ rose to 70 or 71 in the previous example, the January 70 put would 
be sold. Depending on the amount of collateral available, the January 60 put may or 
may not be bought back when the January 70 put is sold. This action of converting 
the strangle write into a straddle write will work out well if the stock stabilizes. It 
will also lessen the pain if the stock continues to rise. However, if the stock revers­
es direction, the January 70 put write will prove to be unprofitable. Technical analy­
sis of the underlying stock may prove to be of some help in deciding whether or not 
to convert the strangle write into a straddle. If there appears to be a relatively large 
chance that the stock could fall back in price, it is probably not worthwhile to roll 
the put up. 
This example of a strangle write is one in which the writer received a large 
amount of premium for selling the put and the call. Many times, however, an aggres­
sive strangle writer is tempted to sell two out-of-the-money options that have only a 
short life remaining. These options would generally be sold at fractional prices. This 
can be an extremely aggressive strategy at times, for if the underlying stock should 
move quickly in either direction through a striking price, there is little the strangle 
writer can do. He must buy in the options to limit his loss. Nevertheless, this type of 
strangle writing - selling short-term, fractionally priced, out-of-the-money options -
appeals to many writers. This is a similar philosophy to that of the naked call writer 
described in Chapter 5, who writes calls that are nearly restricted, figuring there will 
be a large probability that the option will expire worthless. It also has the same risk: 
A large price change or gap opening can cause such devastating losses that many 
profitable trades are wiped away. Selling fractionally priced combinations is a poor 
strategy and should be avoided. 
Before leaving the topic of strangle writing, it may be useful to determine how 
the margin requirements apply to a strangle write. Recall that the margin require­
ment for writing a straddle is 20% of the stock price plus the price of either the put 
or the call, whichever is in-the-money. In a strangle write, however, both options may 
be out-of-the-money, as in the example above. When this is the case, the straddle 
writer is allowed to deduct the smaller out-of-the-money amount from his require­
ment. Thus, if XYZ were at 68 and the January 60 put and the January 70 call had 
been written, the collateral requirement would be 20% of the stock price, plus the