Cl,apter 4: Other Call Buying Strategies 127 
above 40, the resulting profits there would be smaller because the investor would be 
long only one call instead of two. 
Example 2: XYZ has moved up to a price at which the calls are each worth 8 points. 
One of the calls could then be sold, realizing a 5-point profit. The resulting position 
would be short 100 shares of stock and long one call, a protected short sale. The pro­
tected short sale has a limited risk, above 40, of 3 points (the stock was sold short at 
40 and the call was purchased for 3 points). Even if XYZ remains above 40 and the 
maximum 3-point loss has to be taken, the overall reverse hedge would still have 
made a profit of 2 points because of the 5-point profit taken on the one call. 
Conversely, if XYZ drops below 40, the protected short sale position could add to the 
profits already taken on the call. 
There is a variation of this upside protective action. 
Example 3: Instead of selling the one call, one could instead short an additional 100 
shares of stock at 48. If this was done, the overall position would be short 200 shares 
of stock (100 at 40 and the other 100 at 48) and long two calls - again a protected 
short sale. If XYZ remained above 40, there would again be an overall gain of 2 
points. To see this, suppose that XYZ was above 40 at expiration and the two calls 
were exercised to buy 200 shares of stock at 40. This would result in an 8-point prof­
it on the 100 shares sold short at 48, and no gain or loss on the 100 shares sold short 
at 40. The initial call cost of 6 points would be lost. Thus, the overall position would 
profit by 2 points. This means of follow-up action to the upside is more costly in com­
missions, but would provide bigger profits if XYZ fell back below 40, because there 
are 200 shares of XYZ short. 
In theory, if any of the foregoing types of follow-up action were taken and the 
underlying stock did indeed reverse direction and cross back through the striking 
price, the original position could again be established. Suppose that, after covering 
the short stock at 32, XYZ rallied back to 40. Then XYZ could be sold short again, 
reestablishing the original position. If the stock moved outside the break-even points 
again, further follow-up action could be taken. This process could theoretically be 
repeated a number of times. If the stock continued to whipsaw back and forth in a 
trading range, the repeated follow-up actions could produce potentially large profits 
on a small net change in the stock price. In actual practice, it is unlikely that one 
would be fortunate enough to find a stock that moved that far that quickly. 
The disadvantage of applying these follow-up strategies is obvious: One can 
never make a large profit if he continually cuts his profits off at a small, limited