Chapter 23: Spreads Combining Calls and Puts 347 
Example: If the stock were to undergo a very bullish move and rise to 100 before 
April expiration, the April 70 call could be sold for 30 points. (The April 60 put would 
expire worthless in that case.) Alternatively, if the stock plunged to 30 by April expi­
ration, the put at 60 could be sold for 30 points while the call expired worthless. In 
either case, the strategist would have made a substantial profit on his initial 3-point 
investment. 
It may be somewhat difficult for the strategist to decide what he wants to do 
after the near-term options expire worthless. He may be torn between taking the lim­
ited profit that is at hand or holding onto the combination that he owns in hopes of 
larger profits. A reasonable approach for the strategist to take is to do nothing imme­
diately after the near-term options expire worthless. He can hold the longer-term 
options for some time before they will decay enough to produce a loss in the posi­
tion. Referring again to the previous example, when the January options expire 
worthless, the strategist then owns the April combination, which is worth 5 points at 
that time. He can continue to hold the April options for perhaps 6 or 8 weeks before 
they decay to a value of 3 points, even if the stock remains close to 65. At this point, 
the position could be closed for a net loss of the .commission costs involved in the var­
ious transactions. 
As a general rule, one should be willing to hold the combination, even if this 
means that he lets a small profit decay into a loss. The reason for this is that one 
should give himself the maximum opportunity to realize large profits. He will proba­
bly sustain a number of small losses by doing this, but by giving himself the oppor­
tunity for large profits, he has a reasonable chance of having the profits outdistance 
the losses. 
There is a time to take small profits in this strategy. This would be when either 
the puts or the calls were slightly in-the-money as the near-term options expire. 
Example: IfXYZ moved to 71 just as the January options were expiring, the call por­
tion of the spread should be closed. The January 70 call could be bought back for 1 
point and the April 70 call would probably be worth about 5 points. Thus, the call 
portion of the spread could be "sold" for 4 points, enough to cover the entire cost of 
the position. The April 60 put would not have much value with the stock at 71, but it 
should be held just in case the stock should experience a large price decline. Similar 
results would occur on the put side of the spread if the underlying stock were slight­
ly in-the-money, say at 58 or 59, at January expiration. At no time does the strategist 
want to risk being assigned on an option that he is short, so he must always close the 
portion of the position that is in-the-money at near-term expiration. This is only nec­
essary, of course, if the stock has risen above the striking price of the calls or has fall­
en below the striking price of the puts.