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+Chapter 12: Combining Calendar and Ratio Spreads 225 
+time (they would be at parity), there would be a debit of½ point to close the ratio 
+spread. The two April 50 calls would be bought for 6 points and the July 50 call sold 
+for 5½ - a ½ debit. The entire spread transaction would thus have broken even, less 
+commissions, at 53 at April expiration, since the spread was put on for a ½ credit and 
+was taken off for a ½ debit. The risk to the upside depends clearly, then, on how 
+quickly the stock rallies above 50 before April expiration. 
+CHOOSING THE SPREAD 
+Some of the same criteria used in setting up a bullish calendar spread apply here as 
+well. Select a stock that is volatile enough to move above the striking price in the 
+allotted time - after the near-term expires, but before the long call expires. Do not 
+use calls that are so far out-of-the-money that it would be virtually impossible for the 
+stock to reach the striking price. Always set up the spread for a credit, commissions 
+included. This will assure that a profit will be made even if the stock goes nowhere. 
+However, if the credit has to be generated by using an extremely large ratio - greater 
+than 3 short calls to every long one - one should probably reject that choice, since 
+the potential losses in an immediate rally would be large. 
+The upside break-even point prior to April expiration should be determined 
+using a pricing model. Such a model, or the output from one, can generally be 
+obtained from a data service or from some brokerage firms. It is useful to the strate­
+gist to know exactly how much room he has to the upside if the stock begins to rally. 
+This will allow him to take defensive action in the form of closing out the spread 
+before his break-even point is reached. Since a pricing model can estimate a call 
+price for any length of time, the strategist can compute his break-even points at 
+April expiration, 1 month before April expiration, 6 weeks before, and so on. When 
+the long option in a spread expires at a different time from the short option, the 
+break-even point is dynamic. That is, it changes with time. Table 12-1 shows how 
+this information might be accumulated for the example spread used above. Since 
+this example spread was established for a ½-point credit with the stock at 45, the 
+break-even points would be at stock prices where the spread could be removed for 
+a ½-point debit. Suppose the spread was initiated with 95 days remaining until April 
+expiration. In each line of the table, the cost for buying 2 April 50's is ½ point more 
+than the price of the July 50. That is, there would be a ½-point debit involved in 
+closing the spread at those prices. Notice that the break-even price increases as time 
+passes. Initially, the spread would show a loss if the stock moved up at all. This is to 
+be expected, since an immediate move would not allow for any erosion in the time 
+value premium of the near-term calls. As more and more time passes, time weighs