182 Part II: Call Option Strategies 
TABLE 7-3. 
Lowering the break-even price on common stock. 
XYZ Price at Profit on Profit on Short Profit on long Total 
Expiration Stock October 45's October 40 Profit 
35 -$1,300 +$400 -$400 -$1,300 
38 - 1,000 + 400 - 400 - 1,000 
40 800 + 400 - 400 800 
42 600 + 400 - 200 400 
43 500 + 400 - 100 200 
44 400 + 400 0 0 
45 300 + 400 + 100 + 200 
48 0 - 200 + 400 + 200 
50 + 200 - 600 + 600 + 200 
tion. Below 40, the two strategies produce the same result. Finally, between 40 and 
50, the new position outperforms the original stockholder's position. 
In summary, then, the stockholder stands to gain much and gives away very lit­
tle by adding the indicated options to his stock position. If the stock stabilizes at all -
anywhere between 40 and 50 in the example above - the new position would be an 
improvement. Moreover, the investor can break even or make profits on a small rally. 
If the stock continues to drop heavily, nothing additional will be lost except for option 
commissions. Only if the stock rallies very sharply will the stock position outperform 
the total position. 
This strategy- combining a covered write and a bull spread - is sometimes used 
as an initial ( opening) trade as well. That is, an investor who is considering buying 
XYZ at 42 might decide to buy the October 40 and sell two October 45's (for even 
money) at the outset. The resulting position would not be inferior to the outright pur­
chase of XYZ stock, in terms of profit potential, unless XYZ rose above 46 by October 
expiration. 
Bull spreads may also be used as a "substitute" for covered writing. Recall from 
Chapter 2 that writing against warrants can be useful because of the smaller invest­
ment required, especially if the warrant was in-the-money and was not selling at 
much of a premium. The same thinking applies to call options. If there is an in-the­
money call with little or no time premium remaining in it, its purchase may be used 
as a substitute for buying the stock itself Of course, the call will expire, whereas the 
stock will not; but the profit potential of owning a deeply in-the-money call can be