226 Part II: Call Option Strategies 
more heavily on the near-term April calls than on the longer-term July call. Once the 
strategist has this information, he might then look at a chart of the underlying stock. 
If there is resistance for XYZ below 53, his eventual break-even point at April expi­
ration, he could then feel more confident about this spread. 
FOLLOW-UP ACTION 
The main purpose of defensive action in this strategy is to limit losses if the stock 
should rally before April e:xJ)iration. The strategist should be quick to close out the 
spread before any serious losses accrue. The long call quite adequately compen­
sates for the losses on the short calls up to a certain point, a fact demonstrated in 
Table 12-1. However, the stock cannot be allowed to run. A rule of thumb that is 
often useful is to close the spread if the stock breaks out above technical resistance 
or if it breaks above the eventual break-even point at expiration. In the example 
above, the strategist would close the spread if, at any time, XYZ rose above 53 
(before April expiration, of course). 
If a significant amount of time has passed, the strategist might act even more 
quickly in closing the spread. As was shown earlier, if the stock rallies to 50 with only 
a few weeks of time remaining, the spread may actually be at a slight profit at that 
time. It is often the best course of action to take the small profit, if the stock rises 
above the striking price. 
TABLE 12-1. 
Break-even points changing over time. 
Estimated Estimated 
Days Remaining until Break-Even Point April 50 July 50 
April Expiration (Stock Price) Price Price 
90 45 11/2 
60 48 Jl/2 21/2 
30 51 21/2 4 1/2 
0 53 3 51/2 
THE PROBABILITIES ARE GOOD 
This is a strategy with a rather large probability of profit, provided that the defensive 
action described above is adhered to. The spread will make money if the stock never 
rallies above the striking price, since the spread is established for a credit. This in