18: Buying Puts in Conjundion with Call Purchases 283 
dle would be worth more than 5 points and the straddle buyer would make 
y, even though his put expired worthless. To the downside, a similar situation 
Mists. If XYZ were below 45 at expiration, the put would be worth more than 5 
points and he would have a profit despite the fact that the call expired worthless. 
Table 18-1 and Figure 18-1 depict the results of this example straddle purchase at 
expiration. The straddle buyer can immediately determine his break-even points at 
expiration - 45 and 55 in this example. He will lose money if the underlying stock is 
between those break-even points at expiration. He has potentially large profits if 
XYZ should move a great distance away from 50 by expiration. 
One would normally purchase a straddle on a relatively volatile stock that has 
the potential to move far enough to make the straddle profitable in the allotted time. 
This strategy is particularly attractive when option premiums are low, since low pre­
miums will mean a cheaper straddle cost. Although losses may occur in a relatively 
large percentage of cases that are held all the way until their expiration date, there is 
actually only a minute probability of losing one's entire investment. Even if XYZ 
should be at 50 at expiration, there would still be the opportunity to sell the straddle 
for a small amount on the final day of trading. 
TABLE 18-1. 
Results of straddle purchase at expiration. 
XYZ Price at Total Straddle 
Expiration Coll Profit Put Profit Profit 
30 -$ 300 +$1,800 + $1,500 
40 300 + 800 + 500 
45 300 + 300 0 
50 300 200 500 
55 + 200 200 0 
60 + 700 200 + 500 
70 + 1,700 200 + 1,500 
EQUIVALENCES 
Straddle buying is equivalent to the reverse hedge, a strategy described in Chapter 4 
in which one sells the underlying stock short and purchases two calls on the under­
lying stock. Both strategies have similar profit characteristics: a limited loss that 
would occur at the striking price of the options involved, and potentially large prof­
its if the underlying stock should rise or fall far enough in price. The straddle pur-