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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