Let's put together what we've been talking about, develop an
imaginary spread scenario and set it in real life events.

In October, lets say that you begin to hear about IJK stock. It
looks interesting, so you then use a variety of sources to learn
about IJK: news, charts, outside analysts, internet research
etc. From your investigations you decide that this stock is
poised for a strong upward move and you'd like to take advantage
of it.

However, each share is $50.00 and you question whether you want
to put out the capital for enough shares to make the trade
worthwhile.

Now is the time to investigate IJK spreads. Since you are
bullish on the stock, you investigate the bullish plays of the
call spreads and the put spreads. You check the pricing of both
since you are aware that implied volatility and time decay will
affect both your purchase price and your selling price if you
decide to sell out the spread before expiration.

Lets say that you set the spread's maximum potential gain at
$10.00 using our formula. Then you decide you want to buy a call
spread, so you buy 10 IJK Nov. 50 calls and sell 10 IJK Nov 60
calls. The spread is called Nov. 50-60. The spread's cost is
$3.50, which means you pay $3500 for the trade, inexpensive when
you consider that to purchase 1000 shares of IJK stock would
have cost you $50,000!
Now, you wait and follow the stock price of IJK. If you hold the
position to expiration, you face the following losses or gains.

First, if the stock does not move up as you expected and stays
at $50 or decreases in value, your spread is worthless and you
lose the $3500 that you paid for the spread. Second, if the
stock begins to move up, you first recoup your investment and
then move into profits. After the stock has moved up $3.50 you
are at the breakeven point. Every money advance after that
represents profit.

The chart below represents the spread's losses and gains and
your total profit

This chart is based on stock prices at expiration Friday in
November. Until then the spread's value fluctuates between $0
and its maximum (the difference between strike prices) of $10.00

At any time until expiration, you can sell out of the spread but
what you receive for the price may be influenced by implied
volatility and time decay and that will change your profit or
loss. If you hold the spread until expiration and your bullish
lean proves true, your maximum profit on your $3500 investment
is $6500.

You paid $3500 for the spread and received $10,000 at expiration
with the stock at $60.00. That represents a $6500 profit which
is a 186% return.

If you had invested $50,000 for 1000 shares of IJK and at
expiration sold the stock for $60,000, your profit is $10,000
for a 20% return.

For many investors the reward/risk scenario of the spread is
attractive because investors can limit the capital at risk and
the time of risk/reward exposure. The spread also offers
protection if your lean is bullish or bearish. Finally, the
spread has the potential of a large percentage return on
investment.