EXHIBIT 9.4 Apple bear call spread.
The same three at-expiration outcomes are possible here as with the bull
call spread: the stock can be above both strikes, between both strikes, or
below both strikes. If the stock is below both strikes at expiration, both calls
will expire worthless. The rights and obligations cease to exist. In this case,
the entire credit of $440 is profit.
If AAPL is between the two strike prices at expiration, the 395-strike call
will be in-the-money. The short call will get assigned and result in a short
stock position at expiration. The break-even price falls at $399.40—the
short strike plus the $4.40 net premium. This is the price at which the stock
will effectively be sold if assignment occurs.
If Apple is above both strikes at expiration, it means both calls are in-the-
money. Stock is sold at $395 because of assignment and bought back at
$405 through exercise. This leads to a loss of $10 per share on the negative
scalp. Factoring in the $4.40-per-share credit makes the net loss only $5.60
per share with AAPL above $405 at February expiration.
Just as the at-expiration diagram is the same but reversed, the greeks for
this call spread will be similar to those in the bull call spread example
except for the positive and negative signs. See Exhibit 9.5 .
EXHIBIT 9.5 Apple 395–405 bear call spread.