Chapter 7: Bull Spreads 
FIGURE 7-2. 
Lowering the break-even price on common stock. 
C: 
0 
I +$200 
iii 
(/) 
$0 (/) 
.:l 
0 
i5 
e 
Q. 
-$800 
40 
Profit with Options 
, 
,,,' , , 
,,,' 
50 
Stock Price at Expiration 
183 
;f ,, 
very similar to owning the stock. Since such a call costs less to purchase than the stock 
itself would, the buyer is getting essentially the same profit or loss potential with a 
smaller investment. It is natural, then, to think that one might write another call -
one closer to the money- against the deeply in-the-money purchased call. This posi­
tion would have profit characteristics much like a covered write, since the long call 
"simulates" the purchase of stock This position really is, of course, a bull spread, in 
which the purchased call is well in-the-money and the written call is closer to the 
money. Clearly, one would not want to put all of his money into such a strategy and 
forsake covered writing, since, with bull spreads, he could be entirely wiped out in a 
moderate market decline. In a covered writing strategy, one still owns the stocks even 
after a severe market decline. However, one may achieve something of a compromise 
by investing a much smaller amount of money in bull spreads than he might have 
invested in covered writes. He can still retain the same profit potential. The balance 
of the investor's funds could then be placed in interest-bearing securities.