268 
TABLE 16-6. 
Summary of rolling-up transactions. 
Original trade: 
Later: 
Net position: 
Buy 1 October 45 put for 3 
with XYZ at 45 
With XYZ at 48, sell 2 
October 45's for 11/2 each 
and buy l October 50 put for 3 
Long 1 October 50 put 
Short 1 October 45 put 
Part Ill: Put Option Strategies 
$300 debit 
$300 credit 
$300 debit 
$300 debit 
The effect of creating this spread is that the investor has not increased his risk 
at all, but has raised the break-even point for his position. That is, if XYZ merely falls 
a small distance, he will be able to get out even. Without the effect of creating the 
spread, the put holder would need XYZ to fall back to 42 at expiration in order for 
him to break even, since he originally paid 3 points for the October 45 put. His orig­
inal risk was $300. IfXYZ continues to rise in price and the puts in the spread expire 
worthless, the net loss will still be only $300 plus additional commissions. Admittedly, 
the commissions for the spread will increase the loss slightly, but they are small in 
comparison to the debit of the position ($300). On the other hand, if the stock should 
fall back only slightly, to 47 by expiration, the spread will break even. At expiration, 
with XYZ at 47, the in-the-money October 50 put will be worth 3 points and the out­
of-the-money October 45 put will expire worthless. Thus, the investor will recover his 
$300 cost, except for commissions, with XYZ at 47 at expiration. His break-even point 
is raised from 42 to 47, a substantial improvement of his chances for recovery. 
The implementation of this spread strategy reduces the profit potential of the 
position, however. The maximum potential of the spread is 2 points. If XYZ is any­
where below 45 at expiration, the spread will be worth 5 points, since the October 50 
put will sell for 5 points more than the October 45 put. The investor has limited his 
potential profit to 2 points - the 5-point maximum width of the spread, less the 3 
points that he paid to get into the position. He can no longer gain substantially on a 
large drop in price by the underlying stock. This is normally of little concern to the 
put holder faced with an unrealized loss and the potential for a total loss. He gener­
ally would be appreciative of getting out even or of making a small profit. The cre­
ation of the spread accomplishes this objective for him. 
It should also be pointed out that he does not incur the maximum loss of his 
entire debit plus commissions, unless XYZ closes above 50 at expiration. If XYZ is