308 Part Ill: Put Option Strategies 
form of an expected return analysis, will be presented in Chapter 28 on mathemati­
cal applications. 
More screens can be added to produce a more conservative list of straddl<' 
writes. For example, one might want to ignore any straddles that are not worth at 
least a fixed percentage, say 10%, of the underlying stock price. Also, straddles that 
are too short-term, such as ones with less than 30 days of life remaining, might b<' 
thrown out as well. The remaining list of straddle writing candidates should be ones 
that will provide reasonable returns under favorable conditions, and also should be 
readily adaptable to some of the follow-up strategies discussed later. Finally, one 
would generally like to have some amount of technical support at or above the lower 
break-even price and some technical resistance at or below the upper break-even 
point. Thus, once the computer has generated a list of straddles ranked by an index 
such as the one listed above, the straddle writer can further pare down the list by 
looking at the technical pictures of the underlying stocks. 
FOLLOW-UP ACTION 
The risks involved in straddle writing can be quite large. When market conditions are 
favorable, one can make considerable profits, even with restrictive selection require­
ments, and even by allowing considerable extra collateral for adverse stock move­
ments. However, in an extremely volatile market, especially a bullish one, losses can 
occur rapidly and follow-up action must be taken. Since the time premium of a put 
tends to shrink when it goes into-the-money, there is actually slightly less risk to the 
downside than there is to the upside. In an extremely bullish market, the time value 
premiums of call options will not shrink much at all and might even expand. This may 
force the straddle writer to pay excessive amounts of time value premium to buy back 
the written straddle, especially if the movement occurs well in advance of expiration. 
The simplest form of follow-up action is to buy the straddle back when and if the 
underlying stock reaches a break-even point. The idea behind doing so is to limit the 
losses to a small amount, because the straddle should be selling for only slightly more 
than its original value when the stock has reached a break-even point. In practice, 
there are several flaws in this theory. If the underlying stock arrives at a break-even 
point well in advance of expiration, the amount of time value premium remaining in 
the straddle may be extremely large and the writer will be losing a fairly large amount 
by repurchasing the straddle. Thus, a break-even point at expiration is probably a loss 
point prior to expiration. 
Example: After the straddle is established with the stock at 45, there is a sudden rally 
in the stock and it climbs quickly to 52. The call might be selling for 9 points, even