535
OPTION TrAdINg STrATegIeS
 This strategy can perhaps be best understood by comparing it to the long call position (e.g., long 
August $1,250 gold futures call). In eff  ect, the spread trader reduces the premium cost for the long 
call position by the amount of premium received for the sale of the more deeply out-of-the-money 
call. This reduction in the net premium cost of the trade comes at the expense of sacrifi  cing the pos-
sibility of unlimited gain in the event of a large price rise. As can be seen in Figure   35.18   , in contrast 
to the outright long call position, price gains beyond the higher strike price will cease to aff  ect the 
profi  tability of the trade.   
 Strategy 19a: bear Call Money Spread (Short Call with Lower Strike 
price/Long Call with higher Strike price)—Case 1 
example . Buy August $1,150 gold futures call at a premium of $70.10/oz ($7,010) and simultane-
ously sell an August $1,100 gold futures call at a premium of $110.10/oz ($11,010), with August 
gold futures trading at $1,200/oz. (See Table   35.19   a and Figure   35.19   a.)   
Comment.  This type of spread is called a  credit spread,  since the amount of premium received for 
the short call position exceeds the premium paid for the long call position. The maximum possible 
gain on the trade is equal to the net diff  erence between the two premiums. The maximum possible 
loss is equal to the diff  erence between the two strike prices minus the diff  erence between the two 
premiums. The maximum gain would be realized if prices declined to the lower strike price. The 
maximum loss would occur if prices failed to decline to at least the higher strike price. Although 
    FIGURE   35.18    Profi  t/loss Profi  le: Bull Call Money Spread (long Call with lower Strike Price/
Short Call with Higher Strike Price) 
Price of August gold futures at option expiration ($/oz)
Profit/loss at expiration ($)
1,000
3,750
5,000
2,500
0
−1,250
1,250
1,050 1,100 1,150 1,200 1,250
Breakeven price
= $1,260.10
1,300 1,350 1,400
−2,500
Futures price at time
of position initiation