196 Part II: Call Option Strategies 
continue to hold the long call. This can become disastrous if the breakout fails and 
the stock drops, possibly resulting in losses far in excess of the original debit. 
Therefore, this action cannot be considered anything but extremely aggressive and 
illogical for the neutral strategist. 
If a breakout does not occur, the spreader will normally be making unrealized 
profits as time passes. Should this be the case, he may want to set some mental stop­
out points for himself. For example, if the underlying stock is quite close to the strik­
ing price with only two weeks to go, there will be some more profit potential left in 
the spread, but the spreader should be ready to close the position quickly if the stock 
begins to get too far away from the striking price. In this manner, he can leave room 
for more profits to accrue, but he is also attempting to protect the profits that have 
already built up. This is somewhat similar to the action that the ratio writer takes 
when he narrows the range of his action points as more and more time passes. 
THE BULLISH CALENDAR SPREAD 
A less neutral and more bullish type of calendar spread is preferred by the more 
aggressive investor. In a bullish calendar spread, one sells the near-term call and buys 
a longer-term call, but he does this when the underlying stock is some distance below 
the striking price of the calls. This type of position has the attractive features of low 
dollar investment and large potential profits. Of course, there is risk involved as well. 
Example: One might set up a bullish calendar spread in the following manner: 
XYZ common, 45; 
sell the XYZ April 50 for l; and 
buy the XYZ July 50 for 1 ½. 
This investor ideally wants two things to happen. First, he would like the near­
term call to expire worthless. That is why the bullish calendar spread is established 
with out-of-the-money calls: to increase the chances of the short call expiring worth­
less. If this happens, the investor will then own the longer-term call at a net cost of 
his original debit. In this example, his original debit was only ½ of a point to create 
the spread. If the April 50 call expires worthless, the investor will own the July 50 call 
at a net cost of ½ point, plus commissions. 
The investor now needs a second criterion to be fulfilled: The stock must rise in 
price by the time the July 50 call expires. In this example, even if XYZ were to rally 
to only 52 between April and July, the July 50 call could be sold for at least 2 points. 
This represents a substantial percentage gain, because the cost of the call has been