354 Part Ill: Put Option Strategies 
Even though five criteria have been stated, it is relatively easy to find a position that 
satisfies all five conditions. The strategist may also be able to rely upon technical 
input. If the stock seems to be in a near-term trading range, the position may be more 
attractive, for that would indicate that the chances of the near-term combination 
expiring worthless are enhanced. 
The "calendar straddle" is a strategy that looks deceptively attractive. As the 
reader should know by now, options do not decay in a linear fashion. Instead, options 
tend to hold time value premium until they get quite close to expiration, when the 
time value premium disappears at a fast rate. Consequently, the sale of a near-term 
straddle and the simultaneous purchase of a longer-term straddle often appear to be 
attractive because the debit seems small. Again, certain criteria can be set forth that 
will aid in selecting a reasonably attractive position. The stock should be at or very 
near the striking price when the position is established. Since this is basically a neu­
tral strategy, one that offers the largest potential profits at near-term expiration, one 
should want to sell the most time premium possible. This is why the stock must be 
near the striking price initially. The underlying stock does not have to be a volatile 
one, although volatile stocks will most easily satisfy the next two criteria. The near­
term credit should be at least two-thirds of the longer-term debit. In the example 
used to explain this strategy, the near-term straddle was sold for 5, while the longer­
term straddle was bought for 7 points. Thus, the near-term straddle was worth more 
than two-thirds of the longer-term straddle's price. Finally, the position should be 
established with two to four months remaining until near-term expiration. If positions 
with a longer time remaining are used, there is a significant probability that the 
underlying stock will have moved some distance away from the striking price by the 
time the near-term options expire. Summarizing, the three criteria for a "calendar 
straddle" are: 
1. Stock near striking price initially. 
2. Two to four months remaining until near-term expiration. 
3. Near-term straddle price at least two-thirds of longer-term straddle price. 
The "diagonal butterfly" is the most difficult of these three types of positions to 
locate. Again, one would like the stock to be near the middle striking price when the 
position is established. Also, one would like the underlying stock to be somewhat 
volatile, since there is the possibility that long-term options will be owned for free. If 
this comes to pass, the strategist wants the stock to be capable of a large move in 
order to have a chance of generating large profits. The most restrictive criterion -:­
one that will eliminate all but a few possibilities on a daily basis - is that the near­
term straddle price should be at least one and one-half times that of the longer-term,