Chapter 23: Spreads Combining Calls and Puts 331 
vantages are connected with some of the methods of establishing the butterfly 
spread. 
Example: The following prices exist: 
Strike: 
Call: 
Put: 
XYZ common: 60 
50 
12 
60 
6 
5 
70 
2 
1 1 
The method using only the calls indicates that one would buy the 50 call, sell two 60 
calls, and buy the 70 call. Thus, there would be a bull spread in the calls between the 
50 and 60 strikes, and a bear spread in the calls between the 60 and 70 strikes. In a 
similar manner, one could establish a butterfly spread by combining either type of bull 
spread between the 50 and 60 strikes with any type of bear spread between the 60 and 
70 strikes. Some of these spreads would be credit spreads, while others would be debit 
spreads. In fact, one's personal choice between two rather equivalent makeups of the 
butterfly spread might be decided by whether there were a credit or a debit involved. 
Table 23-1 summarizes the four ways in which the butterfly spread might be 
constructed. In order to verify the debits and credits listed, the reader should recall 
that a bull spread consists of buying a lower strike and selling a higher strike, whether 
puts or calls are used. Similarly, bear spreads with either puts or calls consist of buy­
ing a higher strike and selling a lower strike. Note that the third choice - bull spread 
with puts and bear spread with calls - is a short straddle protected by buying the out­
of-the-money put and call. 
In each of the four spreads, the maximum potential profit at expiration is 8 
points if the underlying stock is exactly at 60 at that time. The maximum possible loss 
in any of the four spreads is 2 points, if the stock is at or above 70 at expiration or is 
at or below 50 at expiration. For example, either the top line in the table, where the 
spread is set up only with calls; or the bottom line, where the spread is set up only 
with puts, has a risk equal to the debit involved - 2 points. The large-debit spread 
(second line of table) will be able to be liquidated for a minimum of 10 points at expi­
ration no matter where the stock is, so the risk is also 2 points. (It cost 12 points to 
begin with.) Finally, the credit combination (third line) has a maximum buy-back of 
10 points, so it also has risk of 2 points. In addition, since the striking prices are 10 
points apart, the maximum potential profit is 8 points (maximum profit = striking 
price differential minus maximum risk) in all the cases.