170 Part II: Call Option Strategies 
When a spread order is entered, the options being bought and sold must be 
specified. Two other items must be specified as well: the price at which the spread is 
to be executed, and whether that price is a credit or a debit. If the total price of the 
spread results in a cash inflow to the spread strategist, the spread is a credit spread. 
This merely means that the sell side of the spread brings in a higher price than is paid 
for the buy side of the spread. If the reverse is true - that is, there is a cash outflow 
from the spread transaction - the spread is said to be a debit spread. This means that 
the buy side of the spread costs more than is received from the sell side. It is also 
common to refer to the purchased side of the spread as the long side and to refer to 
the written side of the spread as the short side. 
The price at which a certain spread can be executed is generally not the differ­
ence between the last sale prices of the two options involved in the spread. 
Example: An investor wants to buy an XYZ October 30 and simultaneously sell an 
XYZ October 35 call. If the last sale price of the October 30 was 4 points and the last 
sale price of the October 35 was 2 points, it does not necessarily mean that the spread 
could be done for a 2-point debit (the difference in the last sale prices). In fact, the 
only way to detennine the market price for a spread transaction is to know what the 
bid and asked prices of the options involved are. Suppose the following quotes are 
available on these two calls: 
October 30 call 
October 35 call 
Bid 
37/s 
F/s 
Asked 
41/s 
2 
Lost Sole 
4 
2 
Since the spread in question involves buying the October 30 call and selling the 
October 35, the spreader will, at market, have to pay 41/s for the October 30 ( the asked 
or offering quote) and will receive only F/s (the bid quote) for the October 35. This 
results in a debit of 2¼ points, significantly more than the 2-point difference in the 
last sale prices. Of course, one is free to specify any price he wants for any type of 
transaction. One might enter this spread order at a 21/s-point debit and could have a 
reasonable chance of having the order filled if the floor broker can do better than the 
bid side on the October 35 or better than the offering side on the October 30. 
The point to be learned here is that one cannot assume that last sale prices are 
indicative of the price at which a spread transaction can be executed. This makes 
computer analysis of spread transactions via closing price data somewhat difficult. 
Some computer data services offer (generally at a higher cost) closing bid and asked 
prices as well as closing sale prices. If a strategist is forced to operate with closing