Gaining Exposure 	 	•	 207
that if the option expires when the stock price is at either edge of my valu-
ation range, it is far enough in-the-money to pay me back for both legs of 
the investment (plus an attractive return).
Portfolio Management
As mentioned earlier, this is naturally a more speculative style of option 
investment, and it may well be more beneficial to close the successful leg of 
the strategy before expiration than to hold the position to expiration. Com-
pared with the next strategy presented here (the straddle), the strangle ac-
tually generates worse returns if held to expiration, so if you are happy with 
your returns midway through the investment, you should close the posi-
tion rather than waiting for expiration. The exception to this rule is that if 
news comes out that convinces you that the value of the firm is materially 
higher or lower than what you had originally forecast and uncertainty in 
the other direction has been removed, you should assess the possibility of 
making a more substantial investment in the company.
One common problem with investors—even experienced and sophis-
ticated ones—is that they check the past price history of a stock and decide 
whether the stock has “more room” to move in a particular direction. The 
most important two things to know when considering an investment are its 
value and the uncertainty surrounding that value. Whether the stock was 
cheaper three years ago or much more expensive does not matter—these are 
backward-looking measures, and you cannot invest with a rear-view mirror.
One final note regarding this strategy is what to do with the unused 
leg. If the stock moves up strongly and you take profits on the call, what 
should you do with the put, in other words. Unfortunately, the unused leg is 
almost always worthless, and often it will cost more than it’s worth to close 
it. I usually keep this leg open because you never know what may happen, 
and perhaps before it expires, you will be able to close it at a better price.
This is a speculative strategy—a bit of spice or an after-dinner mint 
in the meal of investing. Don’t expect to get rich using it (if you do get rich 
using it, it means that you were lucky because you would have had to have 
used a lot of leverage in the process), but you may be pleasantly surprised 
with the boost you get from these every once in a while.
Let’s now turn briefly to a related strategy—the straddle.