Chapter 23: Spreads Combining Calls and Puts 339 
COMBINING AN OPTION PURCHASE AND A SPREAD 
It is possible to combine the purchase of a call and a credit put spread to produce a 
position that behaves much like a call buy, although it has less risk over much of the 
profit range. This strategy is often used when one has a quite bullish opinion regard­
ing the underlying security, yet the call one wishes to purchase is "overpriced." In a 
similar manner, if one is bearish on the underlying, he can sometimes combine the 
purchase of a put with the sale of a call credit spread. Both approaches are described 
in this section. 
THE BULLISH SCENARIO 
It sometimes happens that one arrives at a bullish opinion regarding a stock, only to 
find that the options are very expensive. In fact, they may be so expensive as to pre­
clude thoughts of making an outright call purchase. This might happen, for example, 
if the stock has suddenly plummeted in price (perhaps during an ongoing, rapid bear­
ish move by the overall stock market). To buy calls at this time would be overly risky. 
If the underlying began to rally, it would often be the case that the implied volatility 
of the calls would shrink, thus harming one's long call position. 
As a counter to this, it might make sense to buy the call, but at the same time 
to sell a put credit spread. Recall that a put credit spread is a bullish strategy. 
Moreover, since it is presumed that the options are expensive on this particular stock, 
the puts being used in the spread would be expensive as well. Thus, the credit 
received from the spread would be slightly larger than "normal" because the options 
are expensive. 
Example: XYZ is selling at 100. One wishes to purchase the December 100 call as an 
outright bullish speculation. That call is selling for 10. However, one determines that 
the December 100 call is overpriced at these levels. (In order to make this determi­
nation, one would use an option model whose techniques are described in Chapter 
28 on mathematical applications.) Hence, he decides to use the following put spread 
in addition to buying the December 100 call: 
Sell December 90 put, 6 
Buy December 80 put, 3 
The sale of the put spread brings in a 3-point credit. Thus, his total expenditure for 
the entire position is 7 points ( 10 for the December 100 call, less 3 credit from the sale 
of the put spread). If one is correct about his bullish outlook for the stock (i.e., the 
stock goes up), he can in some sense consider that he paid 7 for the call. Another way