537
OPTION TrAdINg STrATegIeS
in the above example the maximum gain exceeds the maximum risk by a factor of 4 to 1, there is 
a greater probability of a net loss on the trade, since prices must decline by $60/oz before a profit 
is realized.
In this type of spread, the trader achieves a bearish position at a fairly low premium cost at the 
expense of sacrificing the potential for unlimited gains in the event of a very sharp price decline. This 
strategy might be appropriate for the trader expecting a price decline but viewing the possibility of a 
very large price slide as being very low .
Strategy 19b: bear Call Money Spread (Short Call with Lower Strike 
price/Long Call with higher Strike price)—Case 2
example. Buy an August $1,300 gold futures call at a premium of $9.10/oz ($9.10) and simultane-
ously sell an August $1,200 gold futures call at a premium of $38.80/oz ($3,880), with August gold 
futures trading at $1,200/oz. (See Table 35.19b and Figure 35.19b.)
Comment. In contrast to the previous strategy, which involved two in-the-money calls, this illustra-
tion is based on a spread consisting of a short at-the-money call and a long out-of-the-money call. 
In a sense, this type of trade can be thought of as a short at-the-money call position with built-in 
stop-loss protection. (The long out-of-the-money call will serve to limit the risk in the short at-the-
money call position.) This risk limitation is achieved at the expense of a reduction in the net premium 
received by the seller of the at-the-money call (by an amount equal to the premium paid for the out-
of-the-money call). This trade-off between risk exposure and the amount of net premium received 
is illustrated in Figure 35.19b, which compares the outright short at-the-money call position to the 
above spread strategy.
tabLe 35.19b  profit/Loss Calculations: bear Call Money Spread (Short Call with Lower Strike price/Long 
Call with higher Strike price); Case 2—Short at-the-Money Call/Long Out-of-the-Money 
Call
(1) (2) (3) (4) (5) (6) (7) (8)
Futures price 
at expiration 
($/oz)
premium of 
august $1,300 
Call ($/oz)
$ amount 
of premium 
paid
premium of 
august $1,200 
Call ($/oz)
$ amount 
of premium 
received
Value of 
$1,300 Call at 
expiration
Value of 
$1,200 Call at 
expiration
profit/Loss on 
position  
[(5) − (3) + (6) − (7)]
1,000 9.1 $910 38.8 $3,880 $0 $0 $2,970
1,050 9.1 $910 38.8 $3,880 $0 $0 $2,970
1,100 9.1 $910 38.8 $3,880 $0 $0 $2,970
1,150 9.1 $910 38.8 $3,880 $0 $0 $2,970
1,200 9.1 $910 38.8 $3,880 $0 $0 $2,970
1,250 9.1 $910 38.8 $3,880 $0 $5,000 –$2,030
1,300 9.1 $910 38.8 $3,880 $0 $10,000 –$7,030
1,350 9.1 $910 38.8 $3,880 $5,000 $15,000 –$7,030
1,400 9.1 $910 38.8 $3,880 $10,000 $20,000 –$7,030