0.,,., 3: Call Buying 
long 1 XYZ October 30 call, 
1hort 1 XYZ October 35 call. 
113 
This is technically known as a bull spread, but the terminology is not important. 
Table 3-4 summarizes the transactions that the buyer has made to acquire this 
spread. The trader now "owns" the spread at a cost of $300, plus commissions. By 
making this trade, he has lowered his break-even point significantly without increas­
ing his risk. However, the maximum profit potential has also been limited; he can no 
longer capitalize on a strong rebound by the underlying stock. 
In order to see that the break-even point has been lowered, consider what the 
results are~ is at 33 at October expiration. The October 30 call would be worth 
3 points and the October 35 would expire worthless with XYZ at 33. Thus, the 
October 30 call could be sold to bring in $300 at that time, and there would not be 
any expense to buy back the October 35. Consequently, the spread could be liqui­
dated for $300, exactly the amount for which it was "bought." The spread then breaks 
even at 33 at expiration. If the call buyer had not rolled down, his break-even point 
would be 38 at expiration, for he paid 3 points for the original October 35 call and he 
would thus need XYZ to be at 38 in order to be able to liquidate the call for 3 points. 
Clearly, the stock has a better chance of recovering to 33 than to 38. Thus, the call 
buyer significantly lowers his break-even point by utilizing this strategy. 
Lowering the break-even point is not the investor's only concern. He must also 
be aware of what has happened to his profit and loss opportunities. The risk remains 
essentially the same the $300 in debits, plus commissions, that has been paid out. 
The risk has actually increased slightly, by the amount of the commissions spent in 
"rolling down." However, the stock price at which this maximum loss would be real­
ized has been lowered. With the original long call, the October 35, the buyer would 
lose the entire $300 investment anywhere below 35 at October expiration. The 
TABLE 3-4. 
Transactions in bull spread. 
Original trade 
Later trade 
Net position 
Trade 
Buy 1 October 35 call at 3 
Sell 2 October 35 calls at 1 1/2 
Buy 1 October 30 call at 3 
Long 1 October 30 call 
Short 1 October 35 call 
Cost before Commissions 
$300 debit 
$300 credit 
$300 debit 
$300 debit