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+Chapter 23: Spreads Combining Calls and Puts 351 
+The potential results from this position may vary widely. However, the risk is 
+limited before near-tenn expiration. If the underlying stock should advance substan­
+tially before January expiration, the puts would be nearly worthless and the calls 
+would both be trading near parity. With the calls at parity, the strategist would have 
+to pay, at most, 5 points to close the call spread, since the striking prices of the calls 
+are 5 points apart. In a similar manner, if the underlying stock had declined substan­
+tially before the near-term January options expired, the calls would be nearly worth­
+less and the puts would be at parity. Again, it would cost a maximum of 5 points to 
+close the put spread, since the difference in the striking prices of the puts is also 5 
+points. The worst result would be a 2-point loss in this example - 3 points of credit 
+were initially received, and the most that the strategist would have to pay to close the 
+position is 5 points. This is the theoretical risk. In actual practice, it is very unlikely 
+that the calls would trade as much as 5 points apart, even if the underlying stock 
+advanced by a large amount, because the longer-term call should retain some small 
+time value premium even if it is deeply in-the-money. A similar analysis might apply 
+to the puts. The risk can always be quickly computed as being equal to the difference 
+between two contiguous striking prices ( two strikes next to each other), less the net 
+credit received. 
+The strategist's objective with this position is to be able to buy back the near­
+tenn straddle for a price less than the original credit received. If he can do this, he 
+will own the longer-term combination for free. 
+Example: Near January expiration, the strategist is able to repurchase the January 40 
+straddle for 2 points. Since he initially received a 3-point credit and is then able to 
+buy back the written straddle for 2 points, he is left with an overall credit in the posi­
+tion of 1 point, less commissions. Once he has done this, the strategist retains the 
+long options, the April 35 put and April 45 call. If the underlying stock should then 
+advance substantially or decline substantially, he could make very large profits. 
+However, even if the long combination expires worthless, the strategist still makes a 
+profit, since he was able to buy the straddle back for less than the amount of the orig­
+inal credit. 
+In this example, the strategist's objective is to buy back the January 40 straddle 
+for less than 3 points, since that is the amount of the initial credit. At expiration, this 
+would mean that the stock would have to be between 37 and 43 for the buy-back to 
+be made for 3 points or less. Although it is possible, certainly, that the stock will be 
+in this fairly narrow range at near-term expiration, it is not probable. However, the 
+strategist who is willing to add to his risk slightly can often achieve the same result by 
+"legging out" of the January 40 straddle. It has repeatedly been stated that one should