Chapter 23: Spreads Combining Calls and Puts 351 
The potential results from this position may vary widely. However, the risk is 
limited before near-tenn expiration. If the underlying stock should advance substan­
tially before January expiration, the puts would be nearly worthless and the calls 
would both be trading near parity. With the calls at parity, the strategist would have 
to pay, at most, 5 points to close the call spread, since the striking prices of the calls 
are 5 points apart. In a similar manner, if the underlying stock had declined substan­
tially before the near-term January options expired, the calls would be nearly worth­
less and the puts would be at parity. Again, it would cost a maximum of 5 points to 
close the put spread, since the difference in the striking prices of the puts is also 5 
points. The worst result would be a 2-point loss in this example - 3 points of credit 
were initially received, and the most that the strategist would have to pay to close the 
position is 5 points. This is the theoretical risk. In actual practice, it is very unlikely 
that the calls would trade as much as 5 points apart, even if the underlying stock 
advanced by a large amount, because the longer-term call should retain some small 
time value premium even if it is deeply in-the-money. A similar analysis might apply 
to the puts. The risk can always be quickly computed as being equal to the difference 
between two contiguous striking prices ( two strikes next to each other), less the net 
credit received. 
The strategist's objective with this position is to be able to buy back the near­
tenn straddle for a price less than the original credit received. If he can do this, he 
will own the longer-term combination for free. 
Example: Near January expiration, the strategist is able to repurchase the January 40 
straddle for 2 points. Since he initially received a 3-point credit and is then able to 
buy back the written straddle for 2 points, he is left with an overall credit in the posi­
tion of 1 point, less commissions. Once he has done this, the strategist retains the 
long options, the April 35 put and April 45 call. If the underlying stock should then 
advance substantially or decline substantially, he could make very large profits. 
However, even if the long combination expires worthless, the strategist still makes a 
profit, since he was able to buy the straddle back for less than the amount of the orig­
inal credit. 
In this example, the strategist's objective is to buy back the January 40 straddle 
for less than 3 points, since that is the amount of the initial credit. At expiration, this 
would mean that the stock would have to be between 37 and 43 for the buy-back to 
be made for 3 points or less. Although it is possible, certainly, that the stock will be 
in this fairly narrow range at near-term expiration, it is not probable. However, the 
strategist who is willing to add to his risk slightly can often achieve the same result by 
"legging out" of the January 40 straddle. It has repeatedly been stated that one should