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Options for the Beginner and Beyond: Unlock the Opportunities and Minimize the Risks by W. Edward Olmstead - Professor of Applied Mathematics McCormick School of Engineering and Applied Sciences Northwestern University

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Debit Vertical Spreads

Bull Call Spread

During July, you decide that XYZ is going to make a significant move up over the next four months going into the fall of the year. XYZ is currently at $35 per share, and you feel it will be at $40 or higher by November.

To play this expected rise in XYZ with options, you consider buying a Nov 35 call for $4.10 per share. But this is an expensive option, when you recognize that all of the $4.10 is time value. Suppose that XYZ barely reaches $40 just as this option expires in November. In this situation, the Nov 35 call option would only be worth $5 per share. This represents a profit of just $.90 per share [5.0 − 4.1 = 0.9], for a return of just 22 percent on your original risk of $410 per contract.

To ...

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