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+C.,,er 5: Naked Call Writing 139 
+third, or 33%, for the writer to lose money. Although there are not usually many 
+optionable stocks selling at or just above $10 per share, these same out-of-the-money 
+writers would also be attracted to selling a call with a striking price 15 when the stock 
+is at 10, because a 50% upward move by the stock would be required for a loss to be 
+realized. 
+This strategy of selling deeply out-of-the-money calls has its apparent attraction 
+in that the writer is assured of a profit unless the underlying stock can rally rather 
+substantially before the call expires. The danger in this strategy is that one or two 
+losses, perhaps amounting to only a couple of points each, could wipe out many peri­
+ods of profits. The stock market does occasionally rally heavily in a short period, as 
+witnessed repeatedly throughout history. Thus, the writer who is adopting this strat­
+egy cannot regard it as a sure thing and certainly cannot afford to establish the writes 
+and forget them. Close monitoring is required in case the market begins to rally, and 
+by no means should losses be allowed to accumulate. 
+The opposite end of the spectrum in naked call writing is the writing of fairly 
+deeply in-the-money calls. Since an in-the-money call would not have much time 
+value premium in it, this writer does not have much leeway to the upside. If the 
+stock rallies at all, the writer of the deeply in-the-money naked call will normally 
+experience a loss. However, should the stock drop in price, this writer will make 
+larger dollar profits than will the writer of the out-of-the-money call. The sale of the 
+deeply in-the-money call simulates the profits that a short seller could make, at least 
+until the stock drops close to the striking price, since the delta of a deeply in-the­
+money call is close to 1. 
+Example: XYZ is selling at 60 and the July 50 call is selling for 10½. IfXYZ rises, the 
+naked writer will lose money, because there is only ½ of a point of time value pre­
+mium in the call. If XYZ falls, the writer will make profits on a point-for-point basis 
+until the stock falls much closer to 50. That is, if XYZ dropped from 60 to 57, the call 
+price would fall by almost 3 points as well. Thus, for quick declines by the stock, the 
+deeply in-the-money write can provide profits nearly equal to those that the short 
+seller could accumulate. Notice that if XYZ falls all the way to 50, the profits on the 
+written call will be large, but will be accumulating at a slower rate as the time value 
+premium builds up with the stock near the striking price. 
+If one is looking to trade a stock on the short side for just a few points of nwve­
+ment, he might use a deeply in-the-nwney naked write instead of shorting the stock. 
+His investment will be smaller - 20% of the stock price for the write as compared to 
+50% of the stock price for the short sale - and his return will thus be larger. (The 
+requirement for the in-the-money amount is offset by applying the call's premium.)