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+Cl,apter 4: Other Call Buying Strategies 119 
+the short seller can cover his short by exercising the long call and buying stock at 40. 
+Thus, the maximum risk that the short seller can incur in this example is the 3 points 
+paid for the call. Table 4-1 and Figure 4-1 depict the results at expiration from uti­
+lizing this strategy. Commissions are not included. Note that the break-even point is 
+37 in this example. That is, if the stock drops 3 points, the protected short sale posi­
+tion will break even because of the 3-point loss on the call. The short seller who did 
+not spend the extra money for the long call would, of course, have a 3-point profit at 
+37. To the upside, however, the protected short sale outperforms a regular short sale 
+if the stock climbs anywhere above 43. At 43, both types of short sales have $300 loss­
+es. But above that level, the loss would continue to grow for a regular short sale, while 
+it is fixed for the short seller who also bought a call. In either case, the short seller's 
+risk is increased slightly by the fact that he is obligated to pay out the dividends on 
+the underlying stock, if any are declared. 
+A simple formula is available for determining the maximum amount of risk 
+when one protects a short sale by buying a call option: 
+Risk = Striking price of purchased call + Call price - Stock price 
+Depending on how much risk the short seller is willing to absorb, he might want to 
+buy an out-of-the-money call as protection rather than an at-the-money call, as was 
+shown in the example above. A smaller dollar amount is spent for the protection 
+when one buys an out-of-the-money call, so that the short seller does not give away 
+as much of his profit potential. However, his risk is larger because the call does not 
+start its protective qualities until the stock goes above the striking price. 
+Example: With XYZ at 40, the short seller of XYZ buys the July 45 call at ½ for pro­
+tection. His maximum possible loss, if XYZ is above 45 at July expiration, would be 
+TABLE 4-1. 
+Results at expiration-protected short sale. 
+XYZ Price at Profit Call Price at Profit Total 
+Expiration on XYZ Expiration on Call Profit 
+20 +$2,000 0 -$ 300 +$1,700 
+30 + 1,000 0 - 300 + 700 
+37 + 300 0 - 300 0 
+40 0 0 - 300 300 
+50 - 1,000 10 + 700 300 
+60 - 2,000 20 + 1,700 300