306 Part Ill: Put Option Strategies 
A straddle could be sold for 7 points. If the stock were above 38 and below 52 at expi­
ration, the straddle writer would profit, since the in-the-money option could ht· 
bought back for less than 7 points in that case, while the out-of-the-money option 
expires worthless (Table 20-2). 
TABLE 20-2. 
The naked straddle write. 
XYZ Price at Call Put Total 
Expiration Profit Profit Profit 
30 +$ 400 -$1,200 -$800 
35 + 400 700 - 300 
38 + 400 400 0 
40 + 400 200 + 200 
45 + 400 + 300 + 700 
50 100 + 300 + 200 
52 300 + 300 0 
55 600 + 300 - 300 
60 - 1,100 + 300 - 800 
Notice that Figure 20-2 has a shape like a roof. The maximum potential profit 
point is at the striking price at expiration, and large potential losses exist in either 
direction if the underlying stock should move too far. The reader may recall that the 
ratio call writing strategy - buying 100 shares of the underlying stock and selling two 
calls - has the same profit graph. These two strategies, the naked straddle write and 
the ratio call write, are equivalent. The two strategies do have some differences, of 
course, as do all equivalent strategies; but they are similar in that both are highly 
probabilistic strategies that can be somewhat complex. In addition, both have large 
potential risks under adverse market conditions or if follow-up strategies are not 
applied. 
The investment required for a naked straddle is the greater of the requirement 
on the call or the put. In general, this means that the margin requirement is equal to 
the requirement for the in-the-money option in a simple naked write. This require­
ment is 20% of the stock price plus the in-the-money option premium. The straddle 
writer should allow enough collateral so that he can take whatever follow-up actions 
he deems necessary without having to incur a margin call. If he is intending to close 
out the straddle if the stock should reach the upside break-even point - 52 in the 
example above - then he should allow enough collateral to finance the position with