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+224 Part II: Call Option Strategies 
+before April expiration. He should then figure his collateral requirement as if the 
+stock were at 53, regardless of what the collateral requirement is at the current time. 
+This is a prudent tactic whenever naked options are involved, since the strategist will 
+never be forced into an unwanted close-out before his defensive action point is 
+reached. The collateral required for this example would then be as follows, assuming 
+the call is trading at 3½: 
+20% of 53 
+Call premium 
+Less initial credit 
+Total collateral to set aside 
+$1,060 
++ 350 
+-___fill 
+$1,360 
+The strategist is not really "investing" anything in this strategy, because his require­
+ment is in the form of collateral, not cash. That is, his current portfolio assets need 
+not be disturbed to set up this spread, although losses would, of course, create deb­
+its in the account. Many naked option strategies are similar in this respect, and the 
+strategist may earn additional money from the collateral value of his portfolio with­
+out disturbing the portfolio itself. However, he should take care to operate such 
+strategies in a conservative manner, since any income earned is "free," but losses may 
+force him to disturb his portfolio. In light of this fact, it is always difficult to compute 
+returns on investment in a strategy that requires only collateral to operate. One can, 
+of course, compute the return on the maximum collateral required during the life of 
+the position. The large investor participating in such a strategy should be satisfied 
+with any sort of positive return. 
+Returning to the example above, the strategist would make his $50 credit, less 
+commissions, if the underlying stock remained below 50 until July expiration. It is not 
+possible to determine the results to the upside so definitively. If the April 50 calls 
+expire worthless and then the stock rallies, the potential profits are limited only by 
+time. The case in which the stock rallies before April expiration is of the most con­
+cern. If the stock rallies immediately, the spread will undoubtedly show a loss. If the 
+stock rallies to 50 more slowly, but still before April expiration, it is possible that the 
+spread will not have changed much. Using the same example, suppose that XYZ ral­
+lies to 50 with only a few weeks of life remaining in the April 50 calls. Then the April 
+50 calls might be selling at l ½ while the July 50 call might be selling at 3. The ratio 
+spread could be closed for even money at that point; the cost of buying back the 2 
+April 50's would equal the credit received from selling the one July 50. He would thus 
+make½ point, less commissions, on the entire spread transaction. Finally, at the expi­
+ration date of the April 50 calls, one can estimate where he would break even. 
+Suppose one estimated that the July 50 call would be selling for 5½ points if XYZ 
+were at 53 at April expiration. Since the April 50 calls would be selling for 3 at that