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+138 Part II: Call Option Strategies 
+"Suitability" also means not risking nwre nwney than one can afford to lose. If 
+one allows the "maximum" margin, then he won't be risking a large portion of his 
+equity unless he is unable to cover when the underlying trades through the strike 
+price of his naked option. Gaps in trading prices would be the culprits that could pre­
+vent one from covering. Gaps are common in stocks, less common in futures, and 
+almost nonexistent in indices. Hence, index options are the options of choice when it 
+comes to naked writing. Index options are discussed later in the book. 
+Finally, there is one more "rule" that a naked option writer must follow: 
+Someone has to be watching the position at all times. Disasters could occur if one 
+were to go on vacation and not pay attention to his naked options. Usually, one's bro­
+ker can watch the position, even if the trader has to call him from his vacation site. 
+In sum, then, to write naked options, one needs to be prepared psychological­
+ly, have sufficient funds, be willing to accept the risk, be able to monitor the position 
+every day, sell options whose implied volatility is extremely high, and cover any naked 
+options that become in-the-money options. 
+RISK AND REWARD 
+One can adjust the apparent risks and rewards from naked call writing by his selec­
+tion of an in-the-money or out-of-the-money call. Writing an out-of-the-money call 
+naked, especially one quite deeply out-of-the-money, offers a high probability of 
+achieving a small profit. Writing an in-the-money call naked has the most profit 
+potential, but it also has higher risks. 
+Example: XYZ is selling at 40 and the July 50 is selling for½. This call could be sold 
+naked. The probability that XYZ could rise to 50 by expiration has to be considered 
+small, especially if there is not a large amount of time remaining in the life of the call. 
+In fact, the stock could rise 25%, or 10 points, by expiration to a price of 50, and the 
+call would still expire worthless. Thus, this naked writer has a good chance of realiz­
+ing a $50 profit, less commissions. There could, of course, be substantial risk in terms 
+of potential profit versus potential loss if the stock rises substantially in price by expi­
+ration. Still, this apparent possibility of achieving additional limited income with a 
+high probability of success has led many investors to use the collateral value of their 
+portfolios to sell deeply out-of-the-money naked calls. 
+For those employing this technique, a favored position is to have a stock at or 
+just about 15 and then sell the near-term option with striking price 20 naked. This 
+option would sell for one-eighth or one-quarter, perhaps, although at times there 
+might not be any bid at all. At this price, the stock would have to rally nearly one-