Chapter 23: Spreads Combining Calls and Puts 343 
Example: A trader buys an XYZ call bull spread for 5 points. The spread uses the 
January 70 calls and the January 80 calls. Later, XYZ advances to a price of 88, but 
there is still a good deal of time remaining in the options. Perhaps the spread has 
widened out only to 7 points at that time. The trader finds it somewhat disappoint­
ing that the spread has not widened out to its maximum profit potential of 10 points. 
However, this is a fairly common occurrence with bull and bear spreads, and is one 
of the factors that may make them less attractive than outright call or put purchases. 
In any case, suppose the following prices exist: 
January 80 put, 5 
January 70 put, 2 
We can use these put prices to verify that the call spread is "in line." Notice that the 
put spread is 3 points and the call spread is 7 points (both are the January 70-January 
80 spread). Thus, they add up to 10 points the width of the strikes. When that 
occurs, we can conclude that the spreads are "in line" and are trading at theoretical­
ly correct prices. 
Knowing this information doesn't help one make any more profits, but it does 
provide some verification of the prices. Many times, one feels frustrated when he 
sees that a call bull spread has not widened out as he expected it to. Using the put 
spread as verification can help keep the strategist "on track" so that he makes ration­
al, not emotional, decisions. 
Now let's look at a similar example, in which perhaps the puts can be used to 
lock in profits on a call bull spread. 
Example: Using the same bull spread as in the previous example, suppose that one 
owns an XYZ call bull spread, having bought the January 70 call and sold the January 
80 call for a debit of 5 points. Now assume it is approaching expiration, and the stock 
is once again at 88. At this time, the spread is theoretically nearing its maximum price 
of 10. However, since both calls are fairly deeply in-the-money, the market-makers 
are making very wide spreads in the calls. Perhaps these are the markets, with the 
stock at 88 and only a week or two remaining until expiration: 
Coll 
January 70 call 
January 80 call 
Bid Price 
17.50 
8.80 
Asked Price 
18.50 
8.20 
If one were to remove this spread at market prices, he would sell his long 
January 70 call for 17.50 and would buy his short January 80 call back for 8.20, a cred-