Chapter 22: Basic Put Spreads 333 
above the higher strike. These are the same qualities that were displayed by a call bull 
spread (Chapter 7). The name "bull spread" is derived from the fact that this is a bull­
ish position: The strategist wants the underlying stock to rise in price. 
The risk is limited in this spread. If the underlying stock should decline by expi­
ration, the maximum loss will be realized with XYZ anywhere below 50 at that time. 
The risk is 5 points in this example. To see this, note that if XYZ were anywhere below 
50 at expiration, the differential between the two puts would widen to 10 points, 
since that is the difference between their striking prices. Thus, the spreader would 
have to pay 10 points to buy the spread back, or to close out the position. Since he 
initially took in a 5-point credit, this means his loss is equal to 5 points - the 10-point 
cost of closing out less the 5 points he received initially. 
The investment required for a bullish put spread is actually a collateral require­
ment, since the spread is a credit spread. The amount of collateral required is equal 
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spread. In this example, the collateral requirement is $500- the $1,000, or 10-point, 
differential in the striking prices less the $500 credit received from the spread. Note 
that the maximum possible loss is always equal to the collateral requirement in a bull­
ish put spread. 
It is not difficult to calculate the break-even point in a bullish spread. ·In this 
example, the break-even point before commissions is 55 at expiration. With XYZ at 
55 in January, the January 50 put would expire worthless and the January 60 put 
would have to be bought back for 5 points. It would be 5 points in-the-money with 
XYZ at 55. Thus, the spreader would break even, since he originally received 5 points 
credit for the spread and would then pay out 5 points to close the spread. The fol­
lowing formulae allow one to quickly compute the details of a bullish put spread: 
Maximum potential risk = Initial collateral requirement 
= Difference in striking prices - Net credit received 
Maximum potential profit= Net credit 
Break-even price = Higher striking price - Net credit 
CALENDAR SPREAD 
In a calendar spread, a near-term option is sold and a longer-term option is bought, 
both with the same striking price. This definition applies to either a put or a call cal­
endar spread. In Chapter 9, it was shown that there were two philosophies available 
for call calendar spreads, either neutral or bullish. Similarly, there are two philoso­
phies available for put calendar spreads: neutral or bearish.