206 Part II: Call Option Strategies 
strikes versus one bear spread with a IO-point difference between strikes, the risk has 
been balanced at both ends. When one uses strike prices that are not evenly spaced 
apart, his margin requirement increases substantially. In such a case, one has to mar­
gin the individual component spreads separately. Therefore, in this example, he 
would have to pay for the two bull spreads ( $200 each, for a total of $400) and then 
margin the additional call bear spread ($700: the $1,000 difference in the strikes, less 
the $300 credit taken in for that portion of the spread). Hence, in this example, the 
margin requirement would be $1,100, even though the risk is only $100. Technically, 
of that $1,100 requirement, the spread trader pays out only $100 in cash (the actual 
debit of the spread), and the rest of the requirement can be satisfied with excess 
equity in his account. 
The same analysis obviously applies whenever 5-point striking price intervals 
exist. There are numerous combinations that could be worked out for lower-priced 
stocks by merely skipping over a striking price ( using the 25's, 30's, and 40's, for exam­
ple). Although there are not normally many stocks trading over $100 per share, the 
same analysis is applicable using 130's, 140's, and 160's, for example. 
FOLLOW-UP ACTION 
Since the butterfly spread has limited risk by its construction, there is usually little 
that the spreader has to do in the way of follow-up action other than avoiding early 
exercise or possibly dosing out the position early to take profits or limit losses even 
further. The only part of the spread that is subject to assignment is the call at the mid­
dle strike. If this call trades at or near parity, in-the-money, the spread should be 
closed. This may happen before expiration if the underlying stock is about to go ex­
dividend. It should be noted that accepting assignment will not increase the risk of 
the spread (because any short calls assigned would still be protected by the remain­
ing long calls). However, the margin requirement would change substantially, since 
one would now have a synthetic put (long calls, short stock) in place. Plus, there may 
be more onerous commissions for trading stock. Therefore, it is usually wise to avoid 
assignment in a butterfly spread, or in any spread, for that matter. 
If the stock is near the middle strike after a reasonable amount of time has 
passed, an unrealized profit will begin to accrue to the spreader. If one feels that the 
underlying stock is about to move away from the middle striking price and thereby 
jeopardize these profits, it may be advantageous to close the spread to take the avail­
able profit. Be certain to include commission costs when determining if an unreal­
ized profit exists. As a general rule of thumb, if one is doing 10 spreads at a time, he