340 Part Ill: Put Option Strategies 
to look at it is this: The sale of the put spread reduces the call price down to a more 
moderate level, one that might be in line with its "theoretical value." In other words, 
the call would not be considered expensive if it were priced at 7 instead of 10. The sale 
of the put spread can be considered a way to reduce the overall cost of the call. 
Of course, the sale of the put spread brings some extra risk into the position 
because, if the stock were to fall dramatically, the put spread could lose 7 points ( the 
width of the strikes in the spread, 10 points, less the initial credit received, 3 points). 
This, added to the call's cost of 10 points, means that the entire risk here is 17 points. 
In fact, that is the margin required for this spread as well. Thus, the overall spread 
still has limited risk, because both the call purchase and the put credit spread are lim­
ited-risk strategies. However, the total risk of the two combined is larger than for 
either one separately. 
Remember that one must be bullish on the underlying in order to employ this 
strategy. So, if his analysis is correct, the upside is what he wants to maximize. If he 
is wrong on his outlook for the stock, then he needs to employ some sort of stop-loss 
measures before the maximum risk of the position is realized. 
The resulting position is shown in Figure 23-1, along with two other plots. The 
straight line marked "Spread at expiration" shows how the profitability of the call pur­
chase combined with a bull spread would look at December expiration. In addition, 
there is a plot with straight lines of the purchase of the December 100 call for 10 
points. That plot can be compared with the three-way spread to see where extra risk 
and reward occur. Note that the three-way spread does better than the outright pur­
chase of the December 100 call as long as the stock is higher than 87 at expiration. 
Since the stock is initially at 100 and,since one is initially bullish on the stock, one 
would have to surmise that the odds of it falling to 87 are fairly small. Thus, the three­
way spread outperforms the outright purchase of the call over a large range of stock 
prices. 
The final plot in Figure 23-1 is that of the three-way spread's profit and losses 
halfway to the expiration date. You can see that it looks much like the profitability of 
merely owning a call: The curve has the same shape as the call pricing curve shown 
in Chapter 1. 
Hence, this three-way strategy can often be more attractive and more profitable 
than merely owning a call option. Remember, though, that it does increase risk and 
require a larger collateral deposit than the outright purchase of the at-the-money call 
would. One can experiment with this strategy, too, in that he might consider buying 
an out-of-the-money call and selling a put spread that brings in enough credit to com­
pletely pay for the call. In that way, he would have no risk as long as the stock 
remained above the higher striking price used in the put credit spread.