ter 18: Buying Puts in Conjunction with Call Purchases 
IILECTING A STRADDLE BUY 
285 
In theory, one could find the best straddle purchases by applying the analyses for best 
call purchases and best put purchases simultaneously. Then, if both the puts and calls 
on a particular stock showed attractive opportunity, the straddle could be bought. 
The straddle should be viewed as an entire position. A similar sort of analysis to that 
proposed for either put or call purchases could be used for straddles as well. First, 
one would assume the stock would move up or down in accordance with its volatili­
ty within a fixed time period, such as 60 or 90 days. Then, the prices of both the put 
and the call could be predicted for this stock movement. The straddles that off er the 
best reward opportunity under this analysis would be the most attractive ones to buy. 
To demonstrate this sort of analysis, the previous example can be utilized again. 
Example: XYZ is at 50 and the July 50 call is selling for 3 while the July 50 put is sell­
ing for 2 points. If the strategist is able to determine that XYZ has a 25% chance of 
being above 54 in 90 days and also has a 25% chance of being below 46 in 90 days, 
he can then predict the option prices. A rigorous method for determining what per­
centage chance a stock has of making a predetermined price movement is presented 
in Chapter 28 on mathematical applications. For now, a general procedure of analy­
sis is more important than its actual implementation. If XYZ were at 54 in 90 days, it 
might be reasonable to assume that the call would be worth 5½ and the put would 
be worth 1 point. The straddle would therefore be worth 6½ points. Similarly, if the 
stock were at 46 in 90 days, the put might be worth 4½ points, and the call worth 1 
point, making the entire straddle worth 5½ points. It is fairly common for the strad­
dle to be higher-priced when it is a fixed distance in-the-money on the call side (such 
as 4 points) than when it is in-the-money on the put side by that same distance. In 
this example, the strategist has now determined that there is a 25% chance that the 
straddle will be worth 6½ points in 90 days on an upside movement, and there is a 
25% chance that the straddle will be worth 5½ points on a downside movement. The 
average price of these two expectations is 6 points. Since the straddle is currently sell­
ing for 5 points, this would represent a 20% profit. If all potential straddles are 
ranked in the same manner - allowing for a 25% chance of upside and downside 
movement by each underlying stock - the straddle buyer will have a common basis 
for comparing various straddle opportunities. 
FOLLOW-UP ACTION 
It has been mentioned frequently that there is a good chance that a stock will remain 
relatively unchanged over a short time period. This does not mean that the stock will