Accepting Exposure   • 225
Tactically, once an investor has decided to accept exposure to a stock’s 
upside potential using a call spread, he or she has a relatively limited choice 
of investments. Let’s assume that we sell the ATM strike; in the IBM ex-
ample shown earlier, there is a choice of nine strike prices at which we 
can cover. The highest dollar amount of premium we can receive—what I 
will call the maximum return—is received by covering at the most distant 
strike. Every strike between the ATM and the most distant strike will at 
most generate some percentage of this maximum return.
Now let’s look at the risk side. Let’s say that we sell the $195-strike call 
and cover using the $210-strike call. Now assume that some bit of good 
news about IBM comes out, and the stock suddenly moves to exactly $210. 
If the option expires when IBM is trading at $210, we will have lost the 
entire amount of margin we posted to support this investment—$15 in all. 
This $15 loss will be offset by the amount of premium we received from 
selling the call spread—$5.47 in the IBM example—generating a net loss of 
$9.53 (= $5.47 − $15). Compare this with the loss that we would suffer if we 
had covered using the most distant call strike. In this case, we would have 
received $6.96 in premium, so if the option expires when IBM is trading at 
the same $210 level as earlier, our net loss would be $8.04 (= $6.96 − $15). 
Because our maximum return is generated with the widest spread, it fol-
lows that our minimum loss for the stock going to any intermediate strike 
price also will be generated with the widest spread.
At the same time, if we always select the widest spread, we face an 
entirely different problem. That is, the widest spread exposes us to the great-
est potential loss. If the stock goes only to $210, it is true that the widest 
spread will generate a smaller loss than the $195–$210 spread. However, in 
the extreme, if the stock moves up strongly to $240, we would lose the $45 
gross amount supporting the margin account and a net amount of $38.04 
(= $45 – $6.96). Contrast this with a net loss of $9.53 for the $195–$210 
spread. Put simply, if the stock moves up only a bit, we will do better with 
the wider spread; if it moves up a lot, it is better to choose a narrower 
spread. 
In short, when thinking about call spreads, we must balance our 
amount of total exposure against the exposure we would have for an inter-
mediate outcome against the total amount of premium we are receiving. If 
we are too protective and initiate the smallest spread possible, our chance