Chapter 7: Bull Spreads 
XYZ common, 42; 
XYZ October 40, 4; and 
XYZ October 45, 2. 
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The stock owner could enhance his overall position by buying one October 40 call 
and selling two October 45 calls. Note that no extra money, except commissions, is 
required for this transaction, because the credit received from selling two October 
45's is $400 and is equal to the cost of buying the October 40 call. However, mainte­
nance and equity requirements still apply, because a spread has been established. 
The resulting position does not have an uncovered, or naked, option in it. One 
of the October 45 calls that was sold is covered by the underlying stock itself. The 
other is part of a bull spread with the October 40 call. It is not particularly important 
that the resulting position is a combination of both a bull spread and a covered write. 
What is important is the profit characteristic of this new total position. 
If XYZ should continue to decline in price and be below 40 at October expira­
tion, all the calls will expire worthless, and the resulting loss to the stock owner will 
be the same (except for the option commissions spent) as if he had merely held onto 
his stock without having done any option trading. 
Since both a covered write and a bull spread are strategies with limited profit 
potential, this new position obviously must have a limited profit. If XYZ is anywhere 
above 45 at October expiration, the maximum profit will be realized. To determine 
the size of the maximum profit, assume that XYZ is at exactly 45 at expiration. In that 
case, the two short October 45's would expire worthless and the long October 40 call 
would be worth 5 points. The option trades would have resulted in a $400 profit on 
the short side ($200 from each October 45 call) plus a $100 profit on the long side, 
for a total profit of $500 from the option trades. Since the stock was originally bought 
at 48 in this example, the stock portion of the position is a $300 loss with XYZ at 45 
at expiration. The overall profit of the position is thus $500 less $300, or $200. 
For stock prices between 40 and 45 at expiration, the results are shown in 
Table 7-3 and Figure 7-2. Figure 7-2 depicts the two columns from the table labeled 
"Profit on Stock" and "Total Profit," so that one can visualize how the new total posi­
tion compares with the original stockholder's profit. Several points should be noted 
from either the graph or the table. First, the break-even point is lowered from 48 to 
44. The new total position breaks even at 44, so that only a 2-point rally by the stock 
by expiration is necessary in order to break even. The two strategies are equal at 50 
at expiration. That is, the stock would have to rally more than 8 points, from 42 to 
50, by expiration for the original stockholder's position to outperform the new posi-