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+238 Part II: Call Option Strategies 
+TABLE 14-1. 
+Comparison of spreads at expiration. 
+Vertical Bull 
+XYZ Price at April 30 April 35 July 30 Spread Diagonal 
+April Expiration Price Price Price Profit Spread Profit 
+20 0 0 0 -$200 -$300 
+24 0 0 1/2 - 200 - 250 
+27 0 0 1 - 200 - 200 
+30 0 0 2 - 200 - 100 
+32 2 0 3 0 0 
+35 5 0 51/2 + 300 + 250 
+40 10 5 10 + 300 + 200 
+45 15 10 15 + 300 + 200 
+spread will actually widen to more than 5 points. Thus, the maximum area of profit 
+at April expiration for the diagonal spread is to have the stock near the striking price 
+of the written call. The figures demonstrate that the diagonal spread gives up a small 
+portion of potential upside profits to provide a hedge to the downside. 
+Once the April 35 call expires, the diagonal spread can be closed. However, if 
+the stock is below 35 at that time, it may be more prudent to then sell the July 35 call 
+against the July 30 call that is held long. This would establish a normal bull spread for 
+the 3 months remaining until July expiration. Note that ifXYZ were still at 32 at April 
+expiration, the July 35 call might be sold for 1 point if the stock's volatility was about 
+the same. This should be true, since the April 35 call was worth 1 point with the stock 
+at 32 three months before expiration. Consequently, the strategist who had pursued 
+this course of action would end up with a normal July bull spread for a net debit of 2 
+points: He originally paid 4 for the July 30 call, but then sold the April 35 for 1 point 
+and subsequently sold the July 35 for 1 point. By looking at the table of prices for the 
+first example in this chapter, the reader can see that it would have cost 2½ points to 
+set up the normal July bull spread originally. Thus, by diagonalizing and having the 
+near-term call expire worthless, the strategist is able to acquire the normal July bull 
+spread at a cheaper cost than he could have originally. This is a specific example of 
+how the diagonalizing effect can prove beneficial if the writer is able to write against 
+the same long call two times, or three times if he originally purchased the longest­
+term call. In this example, if XYZ were anywhere between 30 and 35 at April expira­
+tion, the spread would be converted to a normal July bull spread. If the stock were 
+above 35, the spread should be closed to take the profit. Below 30, the July 30 call 
+would probably be closed or left outright long.