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+122 Part II: Call Option Strategies 
+FOLLOW-UP ACTION 
+There is little that the protected short seller needs to perform in the way of follow­
+up action in this strategy, other than closing out the position. If the underlying stock 
+moves down quickly and it appears that it might rebound, the short sale could be cov­
+ered without selling the long call. In this manner, one could potentially profit on the 
+call side as well if the stock came back above the original striking price. If the under­
+lying stock rises in price, a similar strategy of taking off only the profitable call side 
+of the transaction is not recommended. That is, if XYZ climbed from 40 to 50 and the 
+July 40 call also rose from 3 to 10, it is not advisable to take the 7-point profit in the 
+call, hoping for a drop in the stock price. The reason for this is that one is entering 
+into a highly risk-oriented situation by removing his protection when the call is in­
+the-money. Thus, when the stock drops, it is all right - perhaps even desirable - to 
+take the profit, because there is little or no additional risk if the stock continues to 
+drop. However, when the stock rises, it is not an equivalent situation. In that case, if 
+the short seller sells his call for a profit and the stock subsequently rises even further, 
+large losses could result. 
+It may often be advisable to close the position if the call is at or near parity, 
+in-the-money, by exercising the call. In most strategies, the option holder has no 
+advantage in exercising the call because of the large dollar difference between 
+stock commissions and option commissions. However, in the protected short sale 
+strategy, the short seller is eventually going to have to cover the short stock in any 
+case and incur the stock commission by so doing. It may be to his advantage to 
+exercise the call and buy his stock at the striking price, thereby buying stock at a 
+lower price and perhaps paying a slightly lower commission amount. 
+Example: XYZ rises to 50 from the original short sale price of 40, and the XYZ July 
+40 call is selling at 10 somewhere close to expiration. The position could be liquidat­
+ed by either (1) buying the stock back at 50 and selling the call at 10, or (2) exercis­
+ing the call to buy stock at 40. In the first case, one would pay a stock commission at 
+a price of $50 per share plus an option commission on a $10 option. In the second 
+case, the only commission would be a stock commission at the price of $40 per share. 
+Since both actions accomplish the same end result - closing the position entirely for 
+40 points plus commissions - clearly the second choice is less costly and therefore 
+more desirable. Of course, if the call has time value premium in it of an amount 
+greater than the commission savings, the first alternative should be used.