314 Part Ill: Put Option Strategies 
position. Another advantage of buying the protection initially is that one is protected 
if the stock should expe1ience a gap opening or a trading halt. If he already owns the 
protection, such stock price movement in the direction of the protection is of little 
consequence. However, if he was planning to buy the protection as a follow-up 
action, the sudden surge in the stock price may ruin his strategy. 
The overall profit potential of this position is smaller than that of the normal 
straddle write, since the premium paid for the long call will be lost if the stock is 
below 50 at ex-piration. However, the automatic risk-limiting feature of the long call 
may prove to be worth more than the decrease in profit potential. The strategist has 
peace of mind in a rally and does not have to worry about unlimited losses accruing 
to the upside. 
Downside protection for a straddle writer can be achieved in a similar manner 
by buying an out-of-the-money put at the outset. 
Example: With XYZ at 45, one might write the January 45 straddle for 7 and buy a 
January 40 put for l point if he is concerned about the stock dropping in price. 
It should now be fairly easy to see that the straddle writer could limit risk in 
either direction by initially buying both an out-of-the-money call and an out-of-the­
money put at the same time that the straddle is written. The major benefit in doing 
this is that risk is limited in either direction. Moreover, the margin requirements are 
significantly reduced, since the whole position consists of a call spread and a put 
spread. There are no longer any naked options. The detriment of buying protection 
on both sides initially is that commission costs increase and the overall profit poten­
tial of the straddle write is reduced, perhaps significantly, by the cost of two long 
options. Therefore, one must evaluate whether the cost of the protection is too large 
in comparison to what is received for the straddle write. This completely protected 
strategy can be very attractive when available, and it is described again in Chapter 23, 
Spreads Combining Calls and Puts. 
In summary, any strategy in which the straddle writer also decides to buy pro­
tection presents both advantages and disadvantages. Obviously, the risk-limiting fea­
ture of the purchased options is an advantage. However, the seller of options does not 
like to purchase pure time value premium as protection at any time. He would gen­
erally prefer to buy intrinsic value. The reader will note that, in each of the protec­
tive buying strategies discussed above, the purchased option has a large amount of 
time value premium left in it. Therefore, the writer must often try to strike a delicate 
balance between trying to limit his risk on one hand and trying to hold down the 
expenses of buying long options on the other hand. In the final analysis, however, the 
risk must be limited regardless of the cost.