774 Part VI: Measuring and Trading Volatility 
First, one can see that the bullish spread position has a total risk of 17 points, if 
X'YZ is below 80 (the lower striking price of the put spread) at expiration. That, of 
course, is more than the 10-point cost of the July 100 call by itself, but if one is using 
a trading stop of any sort, he probably would not be at risk for the entire 17 points, 
since he wouldn't hold on while the stock fell all the way to 80 and below. Note also 
that the bullish spread position would have a loss of 10 points (the same as the call) 
at a price of 87 for the common at expiration. Hence, the combined position actual­
ly has less risk than the outright call purchase as long as XYZ is 87 or higher at expi­
ration. Since one is supposedly bullish initially when establishing this strategy, it 
seems likely that he would figure the stock would be 87 or higher at expiration. · 
Figure 37-7 offers another comparison, that of the two positions after 30 days 
have passed. Note that the spread position once again does better on the upside and 
worse on the downside. The crossover point between the two curves is at about a 
price of95. That is, ifXYZ is above 95 in 30 days, the bullish spread position will out­
perform the call buy. 
One final point should be made regarding the investment required. The out­
right call purchase requires an investment of $1,000 - the cost of the long call. The 
bullish spread position requires that $1,000, plus $700 for the spread (IO-point dif­
ference in the strikes, less the 3-point credit received for selling the spread). That's a 
total of $1,700, the risk of the bullish spread position. Hence, the rate of return might 
favor the outright call purchase, depending on how far the stock rallies. 
FIGURE 37-7. 
Results of the two positions in 30 days. 
Cl) 
_g 
:;::, 
e 
Cl.. 
~ 
1000 
-1000 
-2000-
Spread 
95 
110 
Stock 
/ 
Outright Call Purchase 
120