116 Part II: Call Option Strategies 
spread could make is now $100, less commissions. The alternative in this example is 
not nearly as attractive as the previous one, but it might still be worthwhile for the 
call buyer to invoke such a spread if he feels that XYZ has limited rally potential up 
to October expiration. 
One should not automatically discard the use of this strategy merely because a 
debit is required to convert the long call to a spread. Note that to "average down" by 
buying an additional October 35 call at 1 ½ would require an additional investment 
of $150. This is more than the $100 required to convert into the spread position in 
the immediately preceding example. The break-even point on the position that was 
"averaged down" would be over 37 at expiration, whereas the break-even point on the 
spread is 34. Admittedly, the averaged-down position has much more profit potential 
than the spread does, but the conversion to the spread is less expensive than "aver­
aging down" and also provides a lower break-even price. 
In summary, then, if the call buyer finds himself with an unrealized loss because 
the stock has declined, and yet is unwilling to sell, he may be able to improve his 
chances of breaking even by "rolling down" into a spread. That is, he would sell 2 of 
the calls that he is currently long - the one that he owns plus another one - and 
simultaneously buy one call at the next lower striking price. If this transaction of sell­
ing 2 calls and buying 1 call can be done for approximately even money, it could def­
initely be to the buyer's benefit to implement this strategy, because the break-even 
point would be lowered considerably and the buyer would have a much better 
chance of getting out even or making a small profit should the underlying stock have 
a small rebound. 
Creating a Calendar Spread. A different type of defensive spread strategy 
is sometimes used by the call buyer who finds that the underlying stock has declined. 
In this strategy, the holder of an intermediate- or long-term call sells a near-term call, 
with the same striking price as the call he already owns. This creates what is known 
as a calendar spread. The idea behind doing this is that if the short-term call expires 
worthless, the overall cost of the long call will be reduced to the buyer. Then, if the 
stock should rally, the call buyer has a better chance of making a profit. 
Example: Suppose that an investor bought an XYZ October 35 call for 3 points some­
time in April. By June the stock has fallen to 32, and it appears that the stock might 
remain depressed for a while longer. The holder of the October 35 call might con­
sider selling a July 35 call, perhaps for a price of 1 point. Should XYZ remain below 
35 until July expiration, the short call would expire worthless, earning a small, 1-point 
profit. The investor would still own the October 35 call and would then hope for a 
rally by XYZ before October in order to make profits on that call. Even if XYZ does