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+182 Part II: Call Option Strategies 
+TABLE 7-3. 
+Lowering the break-even price on common stock. 
+XYZ Price at Profit on Profit on Short Profit on long Total 
+Expiration Stock October 45's October 40 Profit 
+35 -$1,300 +$400 -$400 -$1,300 
+38 - 1,000 + 400 - 400 - 1,000 
+40 800 + 400 - 400 800 
+42 600 + 400 - 200 400 
+43 500 + 400 - 100 200 
+44 400 + 400 0 0 
+45 300 + 400 + 100 + 200 
+48 0 - 200 + 400 + 200 
+50 + 200 - 600 + 600 + 200 
+tion. Below 40, the two strategies produce the same result. Finally, between 40 and 
+50, the new position outperforms the original stockholder's position. 
+In summary, then, the stockholder stands to gain much and gives away very lit­
+tle by adding the indicated options to his stock position. If the stock stabilizes at all -
+anywhere between 40 and 50 in the example above - the new position would be an 
+improvement. Moreover, the investor can break even or make profits on a small rally. 
+If the stock continues to drop heavily, nothing additional will be lost except for option 
+commissions. Only if the stock rallies very sharply will the stock position outperform 
+the total position. 
+This strategy- combining a covered write and a bull spread - is sometimes used 
+as an initial ( opening) trade as well. That is, an investor who is considering buying 
+XYZ at 42 might decide to buy the October 40 and sell two October 45's (for even 
+money) at the outset. The resulting position would not be inferior to the outright pur­
+chase of XYZ stock, in terms of profit potential, unless XYZ rose above 46 by October 
+expiration. 
+Bull spreads may also be used as a "substitute" for covered writing. Recall from 
+Chapter 2 that writing against warrants can be useful because of the smaller invest­
+ment required, especially if the warrant was in-the-money and was not selling at 
+much of a premium. The same thinking applies to call options. If there is an in-the­
+money call with little or no time premium remaining in it, its purchase may be used 
+as a substitute for buying the stock itself Of course, the call will expire, whereas the 
+stock will not; but the profit potential of owning a deeply in-the-money call can be