144 Part II: Call Option Strategies 
security, the strategist should diversify several moderately sized positions throughout 
a variety of underlying stocks. If he does this, he will probably never have to exceed 
the position limit of contracts short in any one security. 
Even with as many precautions as one might take, there is no guarantee that 
one would have the collateral available to withstand a gain of 1000% or more, such 
as is occasionally seen with high-flying tech stocks or new IPOs. One would probably 
be best served, if he really wants to operate this strategy, to stick with stocks that are 
well capitalized (some of the biggest in the industry), so that they are less suscepti­
ble to such violent upside moves. Even then, though, there is no guarantee that one 
will not run out of collateral in a sharply rising market, because it is impossible to esti­
mate with complete certainty just how far any one stock might advance in a particu­
lar period of time. 
TIME VALUE PREMIUM IS A MISNOMER 
Once again, the topic of time value premium is discussed, as it was in Chapter 3. 
Many novice option traders think that if they sell an out-of-the-money option 
(whether covered or naked), all they have to do is sit back and wait to collect the pre­
mium as time wears it away. However, a lot of things can happen between the time 
an option is sold and its expiration date. The stock can move a great deal, or implied 
volatility can skyrocket. Both are bad for the option seller and both completely coun­
teract any benefit that time decay might be imparting. The option seller must con­
sider what might happen during the life of the option, and not simply view it as a 
strategy to hold the option until expiration. Naked call writers, especially, should 
operate with that thought in mind, but so should covered call writers, even though 
most don't. What the covered writer gives away is the upside; and if he constantly 
sells options without regard to the possibilities of volatility or stock price increases, 
he will be doing himself a disservice. 
So, while it is still proper to refer to the part of an option's price that is not 
intrinsic value as "time value premium," the knowledgeable option trader under­
stands that it is also more heavily influenced by volatility and stock price movement 
than by time. 
SUMMARY 
In a majority of cases, naked call writing is applied as a deeply out-of-the-money 
strategy in which the investor uses the collateral value of his security holdings to par­
ticipate in a strategy that offers a large probability of making a very limited profit. It 
is a poor strategy, because one loss may wipe out many profits. The trader who