Chapter 7: Bull Spreads 
FOLLOW-UP ACTION 
179 
Since the strategy has both limited profit and limited risk, it is not mandatory for the 
spreader to take any follow-up action prior to expiration. If the underlying stock 
advances substantially, the spreader should watch the time value premium in the 
short call closely in order to close the spread if it appears that there is a possibility of 
assignment. This possibility would increase substantially if the time value premium 
disappeared from the short call. If the stock falls, the trader may want to close the 
spread in order to limit his losses even further. 
When the spread is closed, the order should also be entered as a spread trans­
action. If the underlying stock has moved up in price, the order to liquidate would 
be a credit spread involving two closing transactions. The maximum credit that can 
be recovered from a bull spread is an amount equal to the difference between the 
striking prices. In the previous example, if XYZ were above 35 at expiration, one 
might enter an order to liquidate the spread as follows: Buy the October 35 (it is 
common practice to specify the buy side of a spread first when placing an order); 
sell the October 30 at a 5-point credit. In reality, because of the difference between 
bids and offers, it is quite difficult to obtain the entire 5-point credit even if expira­
tion is quite near. Generally, one might ask for a 4¼ or 47/s credit. It is possible to 
close the spread via exercise, although this method is normally advisable only for 
traders who pay little or no commissions. If the short side of a spread is assigned, 
the spreader may satisfy the assignment notice by exercising the long side of his 
spread. There is no margin required to do so, but there are stock commissions 
involved. Since these stock commissions to a public customer would be substantial­
ly larger than the option commissions involved in closing the spread by liquidating 
the options, it is recommended that the public customer attempt to liquidate rather 
than exercise. 
A minor point should be made here. Since the amount of commissions paid to 
liquidate the spread would be larger if higher call prices are involved, the actual net 
maximum profit point for a bull spread is for the stock to be exactly at the higher 
striking price at expiration. If the stock exceeds the higher striking price by a great 
deal, the gross profit will be the same (it was demonstrated earlier that this gross 
profit is the same anywhere above the higher strike at expiration), but the net profit 
will be slightly smaller, since the investor will pay more in commissions to liquidate 
the spread. 
Some spreaders prefer to buy back the short call if the underlying stock drops 
in price, in order to lock in the profit on the short side. They will then hold the long 
call in hopes of a rise in price by the underlying stock, in order to make the long side 
of the spread profitable as well. This amounts to "legging" out of the spread, although