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+Chapter 9: Calendar Spreads 195 
+on the position. Another choice is to leave the spread alone until the near-term call 
+expires and then to hope for a partial recovery from the stock in order to be able to 
+recover some value from the long side of the spread. Such a holding action is often 
+better than the immediate close-out, because the expense of buying back the short 
+call can be quite large percentagewise. A riskier downside defensive action is to sell 
+out the long call if the stock begins to break down heavily. In this way, the spreader 
+recovers something from the long side of his spread immediately, and then looks for 
+the stock to remain depressed so that the short side of the spread will expire worth­
+less. This action requires that one have enough collateral available to margin the 
+resulting naked call, often an amount substantially in excess of the original debit paid 
+for the spread. Moreover, if the underlying stock should reverse direction and rally 
+back to or above the striking price, the short side of the spread is naked and could 
+produce substantial losses. The risk assumed by such a follow-up violates the initial 
+neutral premise of the spread, and should therefore be avoided. Of these three types 
+of downside defensive action, the easiest and rrwst conservative one is to do nothing 
+at all, letting the short call expire worthless and then hoping for a recovery by the 
+underlying stock. If this tack is taken, the risk remains fixed at the original debit paid 
+for the spread, and occasionally a rally may produce large profits on the long call. 
+Although this rally is a nonfrequent event, it generally costs the spreader very little 
+to allow himself the opportunity to take advantage of such a rally if it should occur. 
+In fact, the strategist can employ a slight modification of this sort of action, even 
+if the spread is not at a large loss. If the underlying stock is moderately below the 
+striking price at near-term expiration, the short option will expire worthless and the 
+spreader will be left holding the long option. He could sell the long side immediate­
+ly and perhaps take a small gain or loss. However, it is often a reasonable strategy to 
+sell out a portion of the long side - recovering all or a substantial portion of the ini­
+tial investment - and hold the remainder. If the stock rises, the remaining long posi­
+tion may appreciate substantially. Although this sort of action deviates from the true 
+nature of the time spread, it is not overly risky. 
+An early breakout to the upside by the underlying stock is generally handled in 
+much the same way as a downside breakout. Doing nothing is often the best course 
+of action. If the underlying stock rallies shortly after the spread is established, the 
+spread will shrink by a small amount, but not substantially, because both options will 
+hold premium in a rally. If the spreader were to rush in to close the position, he 
+would be paying commissions on two rather expensive options. He will usually do 
+better to wait and give himself as much of a chance for a reversal as possible. In fact, 
+even at near-term expiration, there will normally be some time premium left in the 
+long option so that the maximum loss would not have to be realized. A highly risk­
+oriented upside defensive action is to cover the short call on a technical breakout and