206  •   The Intelligent Option Investor
avoid this extreme downside are worth much more than they are presently 
trading at.
The entire premium paid must be treated as a realized loss because 
it can never be recovered. If the stock fails to move into one of the areas 
of exposure before option expiration, there will be no profit to offset this 
realized loss.
There is no reason why you have to buy puts and calls in equal num-
bers. If you believe that both upside and downside scenarios are materially 
possible but believe that the downside scenario is more plausible, you can 
buy more puts than calls. This is called ratioing a position. 
T enor Selection
Because the strangle is a combination of two strategies we have already 
discussed, the considerations regarding tenor are the same as for each of 
the components—that is, using the drift advantage in long-term equity an-
ticipating securities (LEAPS) and buying them or the longest-tenor calls 
available and balancing the fight against drift and the cost of rolling and 
buying perhaps shorter-tenor puts.
Strike Price Selection
A strangle is slightly different in nature from its two components—long 
calls and long puts. A strangle is an option investor’s way of expressing 
the belief that the market in general has underestimated the intrinsic 
uncertainty in the valuation of a firm. Options are directional instru-
ments, but a strangle is a strategy that acknowledges that the investor 
has no clear idea of which direction a stock will move but only that 
its future value under different scenarios is different from its present 
market price.
Because both purchased options are OTM ones, this implies, in my 
mind, a more speculative investment and one that lends itself to taking 
profit on it before expiration. Nonetheless, my conservatism forces me to 
select strike prices that would allow a profit on the entire position if the 
stock price is at one of the two strikes at expiration. Because I am buying 
exposure to both the upside and the downside, I always like to make sure