130 
Example: The following prices exist: 
XYZ, 37½; 
XYZ July 40 call, 2; and 
XYZ July 35 call, 4. 
Part II: Call Option Strategies 
If one were to short 100 XYZ at 37½ and to buy one July 40 call for 2 and one July 
35 call for 4, he would have a position that is similar to a reverse hedge except that 
the maximum risk would be realized anywhere between 35 and 40 at expiration. 
Although this risk is over a much wider range than in the normal reverse hedge, it is 
now much smaller in dimension. Table 4-3 and Figure 4-3 show the results from this 
type of position at expiration. The maximum loss is 3½ points ($350), which is a 
smaller amount than could be realized using any ratio strictly with the July 35 or the 
July 40 call. However, this maximum loss is realizable over the entire range, 35 to 40. 
Again, large potential profits are available if the stock moves far enough either to the 
upside or to the downside. 
This form of the strategy should only be used when the stock is nearly centered 
between two strikes and the strategist wants a neutral positioning of the break-even 
points. Similar types of follow-up action to those described earlier can be applied to 
this form of the reverse hedge strategy as well. 
TABLE 4-3. 
Reverse hedge using two strikes. 
XYZ Price at Stock July 40 Coll July 35 Coll Total 
Expiration Profit Profit Profit Profit 
25 +$1,250 -$200 -$ 400 +$ 650 
30 + 750 - 200 400 + 150 
31 1/2 + 600 - 200 400 0 
35 + 250 - 200 400 350 
371/2 0 - 200 150 350 
40 - 250 - 200 + 100 350 
431/2 - 600 + 150 + 450 0 
45 - 750 + 300 + 600 + 150 
50 - 1,250 + 800 + 1,100 + 650