112 Part II: Call Option Strategies 
DEFENSIVE ACTION 
Two follow-up strategies are sometimes employed by the call buyer when the under­
lying stock declines in price. Both involve spread strategies; that is, being long and 
short two different calls on the same underlying stock simultaneously. Spreads are 
discussed in detail in later chapters. This discussion of spreads applies only to their 
use by the call buyer. 
·"Rolling Down." If an option holder owns an option at a currently unreal­
ized loss, it may be possible to greatly increase the chances of making a limited 
profit on a relatively small rebound in the stock price. In certain cases, the 
investor may be able to implement such a strategy at little or no increase in risk. 
Many call buyers have encountered a situation such as this: An XYZ October 35 
call was originally bought for 3 points in hopes of a quick rise in the stock price. 
However, because of downward movements in the stock- to 32, say- the call is now 
at 1 ½ with October expiration nearer. If the call buyer still expects a mild rally in the 
stock before expiration, he might either hold the call or possibly "average down" (buy 
more calls at I½). In either case he will need a rally to nearly 38 by expiration in 
order to break even. Since this would necessitate at least a 15% upward move by the 
stock before expiration, it cannot be considered very likely. Instead, the buyer should 
consider implementing the following strategy, which will be explained through the 
use of an example. 
Example: The investor is long the October 35 call at this time: 
XYZ, 32; 
XYZ October 35 call, 1 ½; and 
XYZ October 30 call, 3. 
One could sell two October 35's and, at the same time, buy one October 30 for no 
additional investment before commissions. That is, the sale of 2 October 35's at $150 
each would bring in $300, exactly the cost, before commissions, of buying the 
October 30 call. This is the key to implementing the roll-down strategy: that one be 
able to buy the lower strike call and sell two of the higher strike calls for nearly even 
money. 
Note that the investor is now short the call that he previously owned, the 
October 35. Where he previously owned one October 35, he has now sold two of 
them. He is also now long one October 30 call. Thus, his position is: