Your uncle owns 10,000 shares of Walmart stock. He is concerned about the short-

term outlook for Walmart’s stock due to an impending “major announcement.” This announcement has received much attention in the press so he expects the stock price will change significantly in the next month, but is unsure whether it will be a profit or a loss.

He hopes the price will increase, but he also doesn’t want to suffer if the price were to fall in the short term.

His broker recommended he buy a “protective put” on the stock, but your uncle has never traded options before and is not much of a risk taker. He wants you to devise a plan for him to capitalize if the announcement is positive but still be protected if the news causes the price to drop. You realize that a protective put will protect him from the downside risk, but you think a strategy of purchasing a call and a put with the same exercise price (known as a “straddle”) may offer similar downside protection, while increasing the upside potential. You decide to show him both strategies and the resulting profits and returns he could face from each.