188 
FIGURE 8-1. 
Bear spread • 
. § +$200 
"it! -~ 
w 
CJ) 30 ig 
..J 
0 
:!: 
e a. -$300 
Part II: Call Option Strategies 
Stock Price at Expiration 
The break-even point, maximum profit potential, and investment required are 
all quite simple computations for a bear spread. 
Maximum profit potential== Net credit received 
Break-even point== Lower striking price + Amount of credit 
Maximum Collateral investment = = risk required 
Difference in 
striking prices 
Credit + Commissions received 
In the example above, the net credit received from the sale of the October 30 
call at 3 and the purchase of the October 35 call at 1 was two points. This is the max­
imum profit potential. The break-even point is then easily computed as the lower 
striking price, 30, plus the amount of the credit, 2, or 32. The risk is equal to the 
investment. It is the difference between the striking prices - 5 points - less the net 
credit received - 2 points - for a total investment of 3 points plus commissions. Since 
this spread involves a call that is not "covered" by a long call with a striking price 
equal to or lower than that of the short call, some brokerage firms may require a 
higher maintenance requirement per spread than would be required for a bull 
spread. Again, since a spread must be done in a margin account, most brokerage 
firms require that a minimum amount of equity be in the account as well. 
Since this is a credit spread, the investor does not really "spend" any dollars to 
establish the spread. The investment is really a reduction in the buying power of the 
customer's margin account, but it does not actually require dollars to be spent when 
the transaction is initiated.