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training_data/curated/text/cd93535a9c5f83610fa7f21536e7e2a482fc7863a0d4582f3486cff7afd293c7.txt

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+0.,,., 3: Call Buying 
+long 1 XYZ October 30 call, 
+1hort 1 XYZ October 35 call. 
+113 
+This is technically known as a bull spread, but the terminology is not important. 
+Table 3-4 summarizes the transactions that the buyer has made to acquire this 
+spread. The trader now "owns" the spread at a cost of $300, plus commissions. By 
+making this trade, he has lowered his break-even point significantly without increas­
+ing his risk. However, the maximum profit potential has also been limited; he can no 
+longer capitalize on a strong rebound by the underlying stock. 
+In order to see that the break-even point has been lowered, consider what the 
+results are~ is at 33 at October expiration. The October 30 call would be worth 
+3 points and the October 35 would expire worthless with XYZ at 33. Thus, the 
+October 30 call could be sold to bring in $300 at that time, and there would not be 
+any expense to buy back the October 35. Consequently, the spread could be liqui­
+dated for $300, exactly the amount for which it was "bought." The spread then breaks 
+even at 33 at expiration. If the call buyer had not rolled down, his break-even point 
+would be 38 at expiration, for he paid 3 points for the original October 35 call and he 
+would thus need XYZ to be at 38 in order to be able to liquidate the call for 3 points. 
+Clearly, the stock has a better chance of recovering to 33 than to 38. Thus, the call 
+buyer significantly lowers his break-even point by utilizing this strategy. 
+Lowering the break-even point is not the investor's only concern. He must also 
+be aware of what has happened to his profit and loss opportunities. The risk remains 
+essentially the same the $300 in debits, plus commissions, that has been paid out. 
+The risk has actually increased slightly, by the amount of the commissions spent in 
+"rolling down." However, the stock price at which this maximum loss would be real­
+ized has been lowered. With the original long call, the October 35, the buyer would 
+lose the entire $300 investment anywhere below 35 at October expiration. The 
+TABLE 3-4. 
+Transactions in bull spread. 
+Original trade 
+Later trade 
+Net position 
+Trade 
+Buy 1 October 35 call at 3 
+Sell 2 October 35 calls at 1 1/2 
+Buy 1 October 30 call at 3 
+Long 1 October 30 call 
+Short 1 October 35 call 
+Cost before Commissions 
+$300 debit 
+$300 credit 
+$300 debit 
+$300 debit