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+128 Part II: Call Option Strategies 
+amount . .. When XYZ falls to 32, the stock can be covered to ensure an overall profit 
+of 2 points on the transaction. However, if XYZ continued to fall to 20, the investor 
+who took no follow-up action would make 14 points while the one who did take fol­
+low-up action would make only 2 points. Recall that it was stated earlier that there is 
+a high probability of realizing limited losses in the reverse hedge strategy, but that 
+this is balanced by the potentially large profits available in the remaining cases. If one 
+takes follow-up action and cuts off these potentially large profits, he is operating at a 
+distinct disadvantage unless he is an extremely adept trader. 
+Proponents of using the follow-up strategy often counter with the argument 
+that it is frustrating to see the stock fall to 32 and then return back to nearly 40 again. 
+If no follow-up action were taken, the unrealized profit would have dissolved into a 
+loss when the stock rallied. This is true as far as it goes, but it is not an effective 
+enough argument to counterbalance the negative effects of cutting off one's profits. 
+ALTERING THE RATIO OF LONG CALLS 
+TO SHORT STOCK 
+Another aspect of this strategy should be discussed. One does not have to buy exact­
+ly two calls against 100 shares of short stock. More bullish positions could be con­
+structed by buying three or four calls against 100 shares short. More bearish positions 
+could be constructed by buying three calls and shorting 200 shares of stock. One 
+might adopt a ratio other than 2:1, because he is more bullish or bearish. He also 
+might use a different ratio if the stock is between two striking prices, but he still 
+wants to create a position that has break-even points spaced equidistant from the cur­
+rent stock price. A few examples will illustrate these points. 
+Example: XYZ is at 40 and the investor is slightly bullish on the stock but still wants 
+to employ the reverse hedge strategy, because he feels there is a chance the stock 
+could drop sharply. He might then short 100 shares of XYZ at 40 and buy 3 July 40 
+calls for 3 points apiece. Since he paid 9 points for the calls, his maximum risk is that 
+9 points if XYZ were to be at 40 at expiration. This means his downside break-even 
+price is 31, for at 31 he would have a 9-point profit on the short sale to offset the 9-
+point loss on the calls. To the upside, his break-even is now 44½. IfXYZ were at 44½ 
+and the calls at 4½ each at expiration, he would lose 4½ points on the short sale, but 
+would make l ½ on each of the three calls, for a total call profit of 4½. 
+A more bearish investor might short 200 XYZ at 40 and buy 3 July 40 calls at 3. 
+His break-even points would be 35½ on the downside and 49 on the upside, and his 
+maximum risk would be 9 points. There is a general formula that one can always