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training_data/relevant/text/6feaa981191d4e3997bdf68608c52b4a8572da40bc80069723cd23169da75436.txt

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+340 Part Ill: Put Option Strategies 
+to look at it is this: The sale of the put spread reduces the call price down to a more 
+moderate level, one that might be in line with its "theoretical value." In other words, 
+the call would not be considered expensive if it were priced at 7 instead of 10. The sale 
+of the put spread can be considered a way to reduce the overall cost of the call. 
+Of course, the sale of the put spread brings some extra risk into the position 
+because, if the stock were to fall dramatically, the put spread could lose 7 points ( the 
+width of the strikes in the spread, 10 points, less the initial credit received, 3 points). 
+This, added to the call's cost of 10 points, means that the entire risk here is 17 points. 
+In fact, that is the margin required for this spread as well. Thus, the overall spread 
+still has limited risk, because both the call purchase and the put credit spread are lim­
+ited-risk strategies. However, the total risk of the two combined is larger than for 
+either one separately. 
+Remember that one must be bullish on the underlying in order to employ this 
+strategy. So, if his analysis is correct, the upside is what he wants to maximize. If he 
+is wrong on his outlook for the stock, then he needs to employ some sort of stop-loss 
+measures before the maximum risk of the position is realized. 
+The resulting position is shown in Figure 23-1, along with two other plots. The 
+straight line marked "Spread at expiration" shows how the profitability of the call pur­
+chase combined with a bull spread would look at December expiration. In addition, 
+there is a plot with straight lines of the purchase of the December 100 call for 10 
+points. That plot can be compared with the three-way spread to see where extra risk 
+and reward occur. Note that the three-way spread does better than the outright pur­
+chase of the December 100 call as long as the stock is higher than 87 at expiration. 
+Since the stock is initially at 100 and,since one is initially bullish on the stock, one 
+would have to surmise that the odds of it falling to 87 are fairly small. Thus, the three­
+way spread outperforms the outright purchase of the call over a large range of stock 
+prices. 
+The final plot in Figure 23-1 is that of the three-way spread's profit and losses 
+halfway to the expiration date. You can see that it looks much like the profitability of 
+merely owning a call: The curve has the same shape as the call pricing curve shown 
+in Chapter 1. 
+Hence, this three-way strategy can often be more attractive and more profitable 
+than merely owning a call option. Remember, though, that it does increase risk and 
+require a larger collateral deposit than the outright purchase of the at-the-money call 
+would. One can experiment with this strategy, too, in that he might consider buying 
+an out-of-the-money call and selling a put spread that brings in enough credit to com­
+pletely pay for the call. In that way, he would have no risk as long as the stock 
+remained above the higher striking price used in the put credit spread.