124 
TABLE 4-2. 
Reverse hedge at July expiration. 
XYZ Price at Stock 
Expiration Profit 
20 +$2,000 
25 + 1,500 
30 + 1,000 
34 + 600 
40 0 
46 600 
50 - 1,000 
55 - 1,500 
60 - 2,000 
FIGURE 4-2. 
Reverse hedge {simulated straddle). 
C: 
0 
~ 
! 
co 
(/) 
(/) 
.3 
~-$600 
e a. 
Profit on 
2 Calls 
-$ 600 
600 
600 
600 
600 
+ 600 
+ 1,400 
+ 2,400 
+ 3,400 
Stock Price at Expiration 
Part II: Call Option Strategies 
Total 
Profit 
+$ l ,400 
+ 900 
+ 400 
0 
600 
0 
+ 400 
+ 900 
+ 1,400 
The net margin required for this strategy is 50% of the underlying stock plus 
the full purchase price of the calls. In the example above, this would be an initial 
investment of $2,000 (50% of the stock price) plus $600 for the calls, or $2,600 total 
plus commissions. The short sale is marked to market, so the collateral requirement 
would grow if the stock rose. Since the maximum risk, before commissions, is $600, 
this means that the net percentage risk in this transaction is $600/$2,600, about 23%.