Chapter 40: Advanced Concepts 889 
Continuing to look at the profit picture, the downside is favorable to the spread 
since the short stock in the position would contribute to ever larger profits in the case 
that XYZ tumbles dramatically (see Figure 40-12). The upside is where problems 
could develop. In 7 days, the position breaks even at about 65 on the upside; in 14 
days, it breaks even at about 67.50. 
The reader may be asking, "Why is there such a dramatic risk to the upside? I 
thought the position was delta neutral and gamma neutral." True, the position was 
originally neutral with respect to both those variables. That neutrality explains the 
flatness of the profit curves about the current stock price of 60. However, once the 
stock has moved 1.50 standard deviations to the upside, the neutrality begins to dis­
appear. To see this, let us look at Figures 40-13 and 40-14 that show both the posi­
tion delta and position gamma 7 days and 14 days after the spread was established. 
Again, these are the same numbers listed in the previous tables. 
First, look at the position delta in 7 days (Figure 40-13). Note that the position 
remains relatively delta neutral with XYZ between 57 and 63. This is because the 
gamma was initially neutral. However, the position begins to get quite delta short if 
XYZ rises above 63 or falls below 57 in 7 days. What is happening to gamma while 
this is going on? Since we just observed that the delta eventually changes, that has to 
mean that the position is acquiring some gamma. 
FIGURE 40-12. 
XYZ ratio spread, gamma and delta neutral. 
4300 
3400 
2500 
1600 
~ 700 a.. 
0 
-200 53 55 57 59 61 63 
.-1100 
-2000 
Stock Price