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+142 Part II: Call Option Strategies 
+this point, even if the stock did finally decline enough for the last set of calls to expire 
+worthless, the overall strategy might still have been operated at a loss. 
+Example: The basic strategy in the case of rising stock is shown in Table 5-3. Note 
+that each transaction is a credit and that all ( except the last) involve taking a realized 
+loss. 
+This example assumes that the stock rose so quickly that a longer-term call was 
+never available to roll into. That is, the October calls were always utilized. If there 
+were a longer-term call available (the January series, for example), the writer should 
+roll up and out as well. In this way, larger credits could be generated. The number of 
+calls written increased from 5 to 15 and the collateral required as backing for the 
+writing of the naked calls also increased heavily. Recall that the collateral require­
+ment is equal to 20% of the stock price plus the call premium, less the amount by 
+which the call is out-of-the-money. The premium may be used against the collateral 
+requirements. Using the stock and call prices of the example above, the investment 
+is computed in Table 5-4. While the number of written calls has tripled from 5 to 15, 
+the collateral requirement has more than quadrupled from $5,000 to $21,000. This is 
+why the investor must have ample collateral backing to utilize this strategy. The gen­
+eral philosophy of the large investors who do apply this strategy is that they hope to 
+eventually make a profit and, since they are using the collateral value of large securi­
+ty positions already held, they are not investing any more money. The strategy does 
+not really "cost" these investors anything. All profits represent additional income and 
+do not in any way disturb the underlying security portfolio. Unfortunately, losses 
+taken due to aborting the strategy could seriously affect the portfolio. This is why the 
+investor must have sufficient collateral to carry through to completion. 
+The sophisticated strategist who implements this strategy will generally do 
+more rolling than that discussed in the simple example above. First, if the stock 
+drops, the calls will be rolled down to the next strike - for a credit - in order to con­
+stantly be selling the most time premium, which is always found in the longest-term 
+at-the-money call. Furthermore, the strategist may want to roll out to a more distant 
+expiration series whenever the opportunity presents itself. This rolling out, or for­
+ward, action is only taken when the stock is relatively unchanged from the initial 
+price and there is no need to roll up or down. 
+This strategy seems ve:ry attractive as long as one has enough collateral backing. 
+Should one use up all of his available collateral, the strategy could collapse, causing 
+substantial losses. It may not necessarily generate large rates of return in rising mar­
+kets, but in stable or declining markets the generation of additional income can be 
+quite substantial. Since the investor is not putting up any additional cash but is uti-