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+Accepting Exposure   • 223
+they own rather than trade them away for a profit. Recall from Chapter 2  
+that experienced option investors do not do this most of the time; they 
+know that because of the existence of time value, it is usually more beneficial 
+for them to sell their option in the market and use the proceeds to buy the stock 
+if they want to hold the underlying. Inexperienced investors, however, often are 
+not conscious of the time-value nuance and sometimes elect to exercise their 
+option. In this case, the exchange randomly pairs the option holders who wish 
+to exercise with an option seller who has promised to sell at that exercise price.
+There is one case in which a sophisticated investor might chose to 
+exercise an ITM call option early, related to a principle in option pricing 
+called put-call parity. This rule, which was used to price options before 
+advent of the BSM, simply states that a certain relationship must exist be-
+tween the price of a put at one strike price, the price of a call at that same 
+strike price, and the market price of the underlying stock. Put-call parity 
+is discussed in Appendix C. In this appendix, you can learn what the exact 
+put-call parity rule is (it is ridiculously simple) and then see how it can be 
+used to determine when it is best to exercise early in case you are long a 
+call and when your short-call (spread) position is in danger of early exercise 
+because of a trading strategy known as dividend arbitrage.
+The assignment process is random, but obviously, the more contracts 
+you sell, the better the chance is that you will be assigned on some part or all 
+of your sold contracts. Even if you hold until expiration, there is still a chance 
+that you may be assigned to fulfill a contract that was exercised on settlement.
+Clearly, from the standpoint of option sale efficiency, an ATM call is the 
+most sensible to sell for the same reason that a short put also was most efficient 
+ATM. As such, the discussion that follows assumes that you are selling the 
+ATM strike and buying back a higher strike to cover.
+In a call-spread strategy, the capital you have at risk is the difference be-
+tween the two strike prices—this is the amount that must be deposited into 
+margin. Depending on which strike price you use to cover, the net premium 
+received differs because the cost of the covering call is cheaper the further 
+OTM you cover. As the covering call becomes more and more OTM, the ratio 
+of premium received to capital at risk changes. Put in these terms, it seems 
+that the short-call spread is a levered strategy because leverage has to do with 
+altering the capital at risk in order to change the percentage return. This con-
+trasts with the short-call spread’s mirror strategy on the put side—short puts—
+in that the short-put strategy is unlevered.