140 Part II: Call Option Strategies 
The writer should take great caution in ascertaining that the call does have some time 
premium in it. He does not want to receive an assignment notice on the written call. 
It is easiest to find time premium in the more distant expiration series, so the writer 
would normally be safest from assignment by writing the longest-term deep in-the­
money call if he wants to make a bearish trade in the stock. 
Example: An investor thinks that XYZ could fall 3 or 4 points from its current price 
of 60 in a quick downward move, and wants to capitalize on that move by writing a 
naked call. If the April 40 were the near-term call, he might have the choice of sell­
ing the April 40 at 20, the July 40 at 20¼, or the October 40 at 20½. Since all three 
calls will drop nearly point for point with the stock in a move to 56 or 57, he should 
write the October 40, as it has the least risk of being assigned. A trader utilizing this 
strategy should limit his losses in much the same way a short seller would, by cover­
ing if the stock rallies, perhaps breaking through overhead technical resistance. 
ROLLING FOR CREDITS 
Most writers of naked calls prefer to use one of the two strategies described above. 
The strategy of writing at-the-money calls, when the stock price is initially close to the 
striking price of the written call, is not widely utilized. This is because the writer who 
wants to limit risk will write an out-of-the-money call, whereas the writer who wants 
to make larger, quick trading profits will write an in-the-money call. There is, how­
ever, a strategy that is designed to utilize the at-the-money call. This strategy offers a 
high degree of eventual success, although there may be an accumulation of losses 
before the success point is reached. It is a strategy that requires large collateral back­
ing, and is therefore only for the largest investors. We call this strategy "rolling for 
credits." The strategy is described here in full, although it can, at times, resemble a 
Martingale strategy; that is, one that requires "doubling up" to succeed, and one that 
can produce ruin if certain physical limits are reached. The classic Martingale strat­
egy is this: Begin by betting one unit; if you lose, double your bet; if you win that bet, 
you'll have netted a profit of one unit (you lost one, but won two); if you lost the sec­
ond bet, double your bet again. No matter how many times you lose, keep doubling 
your bet each time. When you eventually win, you will profit by the amount of your 
original bet (one unit). Unfortunately, such a strategy cannot be employed in real life. 
For example, in a gambling casino, after enough losses, one would bump up against 
the table limit and would no longer be able to double his bet. Consequently, the strat­
egy would be ruined just when it was at its worst point. While "rolling for credits" 
doesn't exactly call for one to double the number of written calls each time, it does 
require that one keep increasing his risk exposure in order to profit by the amount of 
that original credit sold. In general, Martingale strategies should be avoided.