208 Part II: Call Option Strategies 
TABLE 10-3. 
Initial spread and current prices. 
Initial Spread Current Prices 
XYZ common: 60 XYZ common: 45 
July 50 call: 12 July 50 call: 2 
July 60 call: 6 July 60 call: 1 
July 70 call: 3 July 70 call: 1/2 
After buying back the bear spread, he is left with the following bull spread: 
Long July 50 call _ N t d b·t 3u, . t 
h l all e e 1 ,2 pom s S ort Ju y 60 c 
He has a bull spread at the total cost paid to date - 3½ points. From the earlier dis­
cussion of bull spreads, the reader should know that the break-even point for this 
position is 53½ at expiration, and it could make a 6½ point profit if XYZ is anywhere 
over 60 at July expiration. Hence, the break-even point for the position was raised 
from 53 to 53½ by the expense of the ½ point to buy back the bear spread. However, 
if the stock should rally back above 60, the strategist will be making a profit nearly 
equal to the original maximum profit that he was aiming for (7 points). Moreover, this 
profit is now available anywhere over 60, not just exactly at 60 as it was in the origi­
nal position. Although the chances of such a rally cannot be considered great, it does 
not cost the spreader much to restructure himself into a position with a much broad­
er maximum profit area. 
A similar situation is available if the underlying stock moves up in price. In that 
case, the bull spread may be able to be removed at nearly its maximum profit poten­
tial, thereby leaving a bear spread. Again, suppose that the same initial spread was 
established but that XYZ has risen to 75. When the underlying stock advances sub­
stantially, the bull spread portion of the butterfly spread may expand to near its max­
imum potential. Since the strikes are 10 points apart in this bull spread, the widest it 
can grow to is 10 points. At the prices shown in Table 10-4, the bull spread - long 
July 50 and short July 60 - has grown to 9½ points. Thus, the bull spread position 
could be removed within ½ point of its maximum profit potential and the original 
butterfly spread would become a bear spread. Note that the closing of the bull spread 
portion generates a 9½ point credit: The July 50 is sold at 25½ and the July 60 is 
bought back at 16. The original butterfly spread was established at a 3-point debit, so 
the net position is the remaining position: