Chapter 37: How Volatility Affects Popular Strategies 773 very expensive options. If he buys them now and implied volatility returns to its median range near 50%, he will suffer from the decrease in implied volatility. As a possible remedy, he considers selling an out-of-the-money put credit spread at the same time that he buys the calls. The credit from this spread will act as a means of reducing the net cost of the calls. If he's right and the stock goes up, all will be well. However, the introduction of the put spread into the mix has introduced some additional downside risk. Suppose the following prices exist: XYZ: 100 July 100 call: 10 (as stated above) July 90 put: 5 July 80 put: 2 The entire bullish position would now consist of the following: Buy 1 July 100 call at 1 0 Buy 1 July 80 put at 2 Sell 1 July 90 put at 5 Net expenditure: 7 point debit (plus commission) Figure 37-6 shows the profitability, at expiration, of both the outright call pur­ chase and the bullish position constructed above. FIGURE 37-6. Profitability at expiration. 2000 Bullish Spread // / 1000 "' "' 0 ...J 87 :!:: Outright Call Purchase e 0 C. 70 80 90