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+Chapter 13: Reverse Spreads 231 
+calendar spread makes the most money if the stock is right at the strike price at expi­
+ration, and it loses money if the stock rises or falls too far. 
+As with any spread involving options expiring in differing months, it is common 
+practice to look at the profitability of the position at or before the near-term expira­
+tion. An example will show how this strategy can profit. 
+Example: Suppose the current month is April and that XYZ is trading at 80. 
+Furthermore, suppose that XYZ's options are quite expensive, and one believes the 
+underlying stock will be volatile. A reverse calendar spread would be a way to profit 
+from these assumptions. The following prices exist: 
+XYZ December 80 call: 12 
+XYZ July 80 call: 7 
+A reverse calendar spread is established by selling the December 80 call for 12 
+points, and buying the July 80 call for 7, a net credit of 5 points for the spread. 
+If, later, XYZ falls dramatically, both call options will be nearly worthless and the 
+spread could be bought back for a price well below 5. For example, if XYZ were to 
+fall to 50 in a month or so, the July 80 call would be nearly worthless and the 
+December 80 call could be bought back for about a point. Thus, the spread would 
+have shrunk from its initial price of 5 to a price of about 1, a profit of 4 points. 
+The other way to make money would be for implied volatility to decrease. 
+Suppose implied volatility dropped after a month had passed. Then the spread might 
+be worth something like 4 points - an unrealized profit of about 1 point, since it was 
+sold for a price of 5 initially. 
+The profit graph in Figure 13-1 shows the profitability of the reverse calendar. 
+There are two lines on the graph, both of which depict the results at the expiration 
+of the near-term option (the July 80 call in the above example). The lower line shows 
+where profits and losses would occur if implied volatility remained unchanged. You 
+can see that the position could profit if XYZ were to rise above 98 or fall below 70. 
+In addition, the higher curve on the graph shows where profits would lie if implied 
+volatility fell prior to expiration of the near-term options. In that case, additional prof­
+its would accrue, as depicted on the graph. 
+So there are two ways to make money with this strategy, and it is therefore best 
+to establish it when implied volatility is high and the underlying has a tendency to be 
+volatile. 
+The problem with this spread, for stock and index option traders, is that the call 
+that is sold is considered to be naked. This is preposterous, of course, since the short­
+term call is a perfectly valid hedge until it expires. Yet the margin requirements 
+remain onerous. When they were overhauled recently, this glaring inefficiency was