interest and dividends remain constant. Ultimately, the maximum loss will
be 0.80, the premium paid, if there is no time value or carry considerations.
The maximum profit is gained if Bed Bath & Beyond is at $57.50 at
expiration. At this price, the February 57.50 call is worth the most it can be
worth without having the January 57.50 call assigned and creating negative
deltas to the upside. But how much precisely is the maximum profit?
Richard would have to know what the February 57.50 call would be worth
with Bed Bath & Beyond stock trading at $57.50 at February expiration
before he can know the maximum profit potential. Although Richard can’t
know for sure at what price the calls will be trading, he can use a pricing
model to estimate the call’s value. Exhibit 11.2 shows analytics at January
expiration.
EXHIBIT 11.2 Bed Bath & Beyond January–February 57.50 call calendar
greeks at January expiration.
With an unchanged implied volatility of 23 percent, an interest rate of two
percent, and no dividend payable before February expiration, the February
57.50 calls would be valued at 1.53 at January expiration. In this best-case
scenario, therefore, the spread would go from 0.80, where Richard
purchased it, to 1.53, for a gain of 91 percent. At January expiration, with
Bed Bath & Beyond at $57.50, the January call would expire; thus, the
spread is composed of just the February 57.50 call.
Let’s now go back in time and see how Richard figured this trade. Exhibit
11.3 shows the position when the trade is established.