230  •   The Intelligent Option Investor
In this case, you might choose to sell a single $195–$240 call spread, in 
which case your maximum exposure would be $4,500 [= 1 × (240 – 195) × 100] 
at the widest spread. This investment would have a leverage ratio of approxi-
mately 1:1. Alternatively, you could choose to sell two $195–$220 spreads, in 
which case your maximum exposure would be $5,000 [= 2 × (220 − 195) × 
100], with a leverage ratio of approximately 2:1. Which choice you select will 
depend on your assessment of the valuation of the stock, your risk tolerance, 
and the composition of your portfolio (i.e., how much of your portfolio is al-
located to the tech sector, in this example of an investment in IBM). Because 
the monetary returns from a short-call or call-spread strategy are fixed and 
the potential for losses are rather high, I prefer to execute bearish investments 
using the long-put strategy discussed in the “Gaining Exposure” section.
With this explanation of the short-call spread complete, we have all the 
building blocks necessary to understand all the other strategies mentioned 
in this book. Let’s now turn to two nonrecommended complex strategies 
for accepting exposure—the short straddle and the short strangle—both of 
which are included not because they are good strategies but rather for the 
sake of completeness.
Short Straddle/Short Strangle
Short Straddle
RED
Downside: Overvalued
Upside: Overvalued
Execute: Sell an ATM put; simultaneously sell an ATM call spread