Cl,apter 5: Naked Call Writing 141 
In essence, the writer who is rollingf or credits sells the most time premium that 
he can at any point in time. This would generally be the longest-term, at-the-money 
call. If the stock declines, the writer makes the time premium that he sold. However, 
if the stock rises in price, the writer rolls up for a credit. That is, when the stock 
reaches the next higher striking price, the writer buys back the calls that were origi­
nally sold and sells enough long-term calls at the higher strike to generate a credit. 
In this way, no debits are incurred, although a realized loss is taken on the rolling up. 
If the stock persists and rises to the next striking price, the process is repeated. 
Eventually, the stock will stop rising - they always do - and the last set of written 
options will expire worthless. At that time, the writer would make an overall profit 
consisting of an amount equal to all the credits that he had taken in so far. In reality, 
most of that credit will simply be the initial credit received. The "rolls" are done for 
even money or a small credit. In essence, the increased risk generated by continual­
ly rolling up is all geared toward eventually capturing that initial credit. The similar­
ity to the Martingale strategy is strongest in this regard: One continually increases his 
risk, knowing that when he eventually wins (i.e., the last set of options expires worth­
less), he profits by the amount of his original "bet." 
There are really only two requirements for success in this strategy. The first is 
that the underlying stock eventually fall back, that it does not rise indefinitely. This is 
hardly a requirement; it is axiomatic that all stocks will eventually undergo a correc­
tion, so this is a simple requirement to satisfy. The second requirement is that the 
investor have enough collateral backing to stay with the strategy even if the stock runs 
up heavily against him. 
This is a much harder requirement to satisfy, and may in fact tum out to be 
nearly impossible to satisfy. If the stock were to experience a straight-line upward 
move, the number of calls written might grow so substantially that they would 
require an unrealistically large amount of collateral (margin). At a minimum, this 
strategy is applicable only for the largest investors. For such well-collateralized 
investors, this strategy can be thought of as a way to add income to a portfolio. That 
is, a large stock portfolio's equity may be used to finance this strategy through its loan 
value. There would be no margin interest charges, because all transactions are cred­
it transactions. (No debits are created, as long as the Martingale "limits" are not 
reached.) The securities portfolio would not have to be touched unless the strategy 
were terminated before the last set of calls expired worthless. 
This is where the danger comes in: If the stock upon which the calls are written 
rises so fast that one completely uses up all of his collateral value to finance the naked 
calls, and then one is required to roll again, the strategy could result in large losses. 
For a while, one could simply continue to roll the same number of calls up for deb­
its, but eventually those debits would mount in size if the stock persisted in rising. At