V.13:10 (429): SIDEBAR: Expectations and Spread Positions

EXPECTATIONS AND SPREAD POSITIONS

For bull market forecasts, graphs in the top half of the article's Figure 3 portray two spread positions. In these positions, the leftmost line on each graph depicts maximum loss as the premium paid for the call debit spread and the difference in strike prices less premium received for the put credit spread. If the price of the underlying issue increases, the loss line first assumes an upward movement as it transverses diagonally to the right and across the zero or breakeven line. The breakeven point for a two-contract call debit spread position is the sum of the lower strike price and the premium paid. Thus, the position is net zero when the underlying issue rises from the lowest strike price until it equals premium paid. For a put credit spread, the breakeven point is the highest strike price (the short position) less premium received. So, the position is net zero when the underlying issue moves below the highest strike price until it equals premium received.