EXHIBIT 11.1 Bed Bath & Beyond January–February 57.50 calendar.
The only point on the diagram that is drawn with definitive accuracy is
the maximum loss to the downside at expiration of the January call. The
maximum loss if Bed Bath & Beyond falls low enough is 0.80—the debit
paid for the spread. If Bed Bath & Beyond is below $57.50 at January
expiration, the January 57.50 call expires worthless, and the February 57.50
call may or may not have residual value. If Bed Bath & Beyond declines
enough, the February 57.50 call can lose all of its value, even with residual
time until expiration. If the stock falls enough, the entire 0.80 debit would
be a loss.
If Bed Bath & Beyond is above $57.50 at January expiration, the January
57.50 call will be trading at parity. It will be a negative-100-delta option,
imitating short stock. If Bed Bath & Beyond is trading high enough, the
February 57.50 call will become a positive-100-delta option trading at
parity plus the interest calculated on the strike. The February deep-in-the-
money option would imitate long stock. At a 2 percent interest rate, interest
on the 57.50 strike is about 0.17. Therefore, Richard would essentially have
a short stock position from $57.50 from the January 57.50 call and would
be essentially long stock from $57.50 plus 0.28 from the February call. The
maximum loss to the upside is about 0.63 (0.80 − 0.17).
The maximum loss if Bed Bath & Beyond is trading over $57.50 at
expiration is only an estimate that assumes there is no time value and that