O,apter 16: Put Option Buying 269 
anywhere below 50, the October 50 will have some value and the investor will be able 
to recover something from the position. This is distinctly different from the original 
put holding of the October 45, whereby the maximum loss would be incurred unless 
the stock were below 45 at expiration. Thus, the introduction of the spread also 
reduces the chances of having to realize the maximum loss. 
In summary, the put holder faced with an unrealized loss may be able to create 
a spread by selling twice the number of puts that he is currently long and simultane­
ously buying the put at the next higher strike. This action should be used only if the 
spread can be transacted at a small debit or, preferably, at even money (zero debit). 
The spread position offers a much better chance of breaking even and also reduces 
the possibility of having to realize the maximum loss in the position. However, the 
introduction of these loss-limiting measures reduces the maximum potential of the 
position if the underlying stock should subsequently decline in price by a significant 
amount. Using this spread strategy for puts would require a margin account, just as 
calls do. 
THE CALENDAR SPREAD STRATEGY 
Another strategy is sometimes available to the put holder who has an unrealized loss. 
If the put that he is holding has an intermediate-term or long-term expiration date, 
he might be able to create a calendar spread by selling the near-term put against the 
put that he currently holds. 
Example: An investor bought an XYZ October 45 put for 3 points when the stock was 
at 45. The stock rises to 48, moving in the wrong direction for the put buyer, and his 
put falls in value to 1 ½. He might, at that time, consider selling the near-term July 
45 put for 1 point. The ideal situation would be for the July 45 put to expire worth­
less, reducing the cost of his long put by 1 point. Then, if the underlying stock 
declined below 45, he could profit after July expiration. 
The major drawback to this strategy is that little or no profit will be made - in 
fact, a loss is quite possible - if the underlying stock falls back to 45 or below before 
the near-term July option expires. Puts display different qualities in their time value 
premiums than calls do, as has been noted before. With the stock at 45, the differ­
ential between the July 45 put and the October 45 put might not widen much at all. 
This would mean that the spread has not gained anything, and the spreader has a loss 
equal to his commissions plus the initial unrealized loss. In the example above, ifXYZ 
dropped quickly back to 45, the July 45 might be worth 1 ½ and the October worth 
2½. At this point, the spreader would have a loss on both sides of his spread: He sold 
the July 45 put for 1 and it is now 1 ½; he bought the October 45 for 3 and it is now