174 Part II: Call Option Strategies 
would merely buy the October 30 call outright. However, the sale of the October 35 
call against the purchase of the October 30 allows him to take a position that will out­
perform the outright purchase of the October 30, dollarwise, as long as the stock does 
not rise above 36 by expiration. This fact is demonstrated by the dashed line in Figure 
7-1. 
Therefore, the strategist establishing the bull spread is bullish, but not overly so. 
To verify that this comparison is correct, note that if one bought the October 30 call 
outright for 3 points, he would have a 3-point profit at expiration if XYZ were at 36. 
Both strategies have a 3-point profit at 36 at expiration. Below 36, the bull spread 
does better because the sale of the October 35 call brings in the extra point of pre­
mium. Above 36 at expiration, the outright purchase outperforms the bull spread, 
because there is no limit on the profits that can occur in an outright purchase situa­
tion. 
The net investment required for a bull spread is the net debit plus commissions. 
Since. the spread must be transacted in a margin account, there will generally be a 
minimum equity requirement imposed by the brokerage firm. In addition, there may 
be a maintenance requirement by some brokers. Suppose that one was establishing 
10 spreads at the prices given in the example above. His investment, before com­
missions, would be $2,000 ($200 per spread), plus commissions. It is a simple matter 
to compute the break-even point and the maximum profit potential of a call bull 
spread: 
Break-even point= Lower striking price+ Net debit of spread 
Maximum profit _ Higher striking _ Lower striking _ Net debit 
potential - price price of spread 
In the example above, the net debit was 2 points. Therefore, the break-even 
point would be 30 + 2, or 32. The maximum profit potential would be 35 - 30 - 2, or 
3 points. These figures agree with Table 7-1 and Figure 7-1. Commissions may rep­
resent a significant percentage of the profit and net investment, and should therefore 
be calculated before establishing the position. If these commissions are included in 
the net debit to establish the spread, they conveniently fit into the preceding formu­
lae. Commission charges can be reduced percentagewise by spreading a larger quan­
tity of calls. For this reason, it is generally advisable to spread at least 5 options at a 
time.