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+174 Part II: Call Option Strategies 
+would merely buy the October 30 call outright. However, the sale of the October 35 
+call against the purchase of the October 30 allows him to take a position that will out­
+perform the outright purchase of the October 30, dollarwise, as long as the stock does 
+not rise above 36 by expiration. This fact is demonstrated by the dashed line in Figure 
+7-1. 
+Therefore, the strategist establishing the bull spread is bullish, but not overly so. 
+To verify that this comparison is correct, note that if one bought the October 30 call 
+outright for 3 points, he would have a 3-point profit at expiration if XYZ were at 36. 
+Both strategies have a 3-point profit at 36 at expiration. Below 36, the bull spread 
+does better because the sale of the October 35 call brings in the extra point of pre­
+mium. Above 36 at expiration, the outright purchase outperforms the bull spread, 
+because there is no limit on the profits that can occur in an outright purchase situa­
+tion. 
+The net investment required for a bull spread is the net debit plus commissions. 
+Since. the spread must be transacted in a margin account, there will generally be a 
+minimum equity requirement imposed by the brokerage firm. In addition, there may 
+be a maintenance requirement by some brokers. Suppose that one was establishing 
+10 spreads at the prices given in the example above. His investment, before com­
+missions, would be $2,000 ($200 per spread), plus commissions. It is a simple matter 
+to compute the break-even point and the maximum profit potential of a call bull 
+spread: 
+Break-even point= Lower striking price+ Net debit of spread 
+Maximum profit _ Higher striking _ Lower striking _ Net debit 
+potential - price price of spread 
+In the example above, the net debit was 2 points. Therefore, the break-even 
+point would be 30 + 2, or 32. The maximum profit potential would be 35 - 30 - 2, or 
+3 points. These figures agree with Table 7-1 and Figure 7-1. Commissions may rep­
+resent a significant percentage of the profit and net investment, and should therefore 
+be calculated before establishing the position. If these commissions are included in 
+the net debit to establish the spread, they conveniently fit into the preceding formu­
+lae. Commission charges can be reduced percentagewise by spreading a larger quan­
+tity of calls. For this reason, it is generally advisable to spread at least 5 options at a 
+time.