404 Part Ill: Put Option Strategies 
Example: The following prices exist in the month of January: 
XYZ: 105 
April 100 call: 10 1/2 
April 110 call: 5 1/2 
January (2-year) 100 call: 26 
January (2-year) 110 call: 21 1/2 
An investor is considering a bull spread in XYZ and is unsure about whether to use 
the short-term calls, the LEAPS calls, or a mixture. These are his choices: 
Short-term bull spread: 
Diagonal bull spread: 
LEAPS bull spread: 
Buy April 100@ 101/2 
Sell April 110@ 51/2 
Net Debit: $500 
Buy January LEAPS 100 @ 26 
Sell April 110@ 51/2 
Net Debit: $2,050 
Buy January LEAPS 1 00 @ 26 
Sell January LEAPS 110@ 21 1/2 
Net Debit: $450 
Notice that the debit paid for the LEAPS spread is slightly less than that of the short­
term bull spread. This means that they have approximately the same profit potential 
at their respective expiration dates. However, the strategist is more concerned with 
how these compare directly with each other. The obvious point in time to make this 
comparison is when the short-term options expire. 
Figure 25-7 shows the profitability of these three positions at April expiration. 
It was assumed that all of the following were the same in April as they had been in 
January: volatility, short-term rates, and dividend payout. 
Note that the short-term bull spread has the familiar profit graph from Chapter 
7, making its maximum profit over 110 and taking its maximum loss below 100. (See 
Table 25-4.) 
The LEAPS spread doesn't generate much of either a profit or a loss in only 
three months' time. Even if XYZ rises to 120, the LEAPS bull spread will have only 
a $150 profit. Conversely, if XYZ falls to 80, the spread loses only about $200. This 
price action is very typical for long-term bull spreads when both options have a sig­
nificant amount of time premium remaining in them.