Spreads Cotnbining 
Calls and Puts 
Certain types of spreads can be constructed that utilize both puts and calls. One of 
these strategies has been discussed before: the butterfly spread. However, other 
strategies exist that off er potentially large profits to the spreader. These other strate­
gies are all variations of calendar spreads and/or straddles that involve both put and 
call options. 
THE BUTTERFLY SPREAD 
This strategy has been described previously, although its usage in Chapter 10 was 
restricted to constructing the spread with calls. Recall that the butterfly spread is a 
neutral position that has limited risk as well as limited profits. The position involves 
three striking prices, utilizing a bull spread between the lower two strikes and a bear 
spread between the higher two strikes. The maximum profit is realized at the middle 
strike at expiration, and the maximum loss is realized if the stock is above the higher 
strike or below the lower strike at expiration. 
Since either a bull spread or a bear spread can be constructed with puts or calls, 
it should be obvious that a butterfly spread ( consisting of both a bull spread and a 
bear spread) can be constructed in a number of ways. In fact, there are four ways in 
which the spread can be established. If option prices are fairly balanced - that is, the 
arbitrageurs are keeping prices in line - any of the four ways will have the same 
potential profits and losses at expiration of the options. However, because of the ways 
in which puts and calls behave prior to their expiration, certain advantages or disad-
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