220  •   The Intelligent Option Investor
The decision to leave the position open must depend on what other 
potential investments you are able to make and how the stock position that 
will likely be put to you at expiration of the option contract stacks up on a 
relative basis. For instance, let’s assume that you had received a premium 
of $2.50 for writing the puts struck at $50. This gives you an effective buy 
price of $47.50. The stock is now trading at $43 per share, so you can think 
of your position as an unlevered, unrealized loss of $4.50, or a little under 
10 percent of your EBP . Y our new worst-case valuation is $55 per share, 
which implies a gain of about 15 percent on your EBP; your new best-case 
valuation is $65 per share, which implies a gain of 37 percent.
How do these numbers compare with other investments in your port-
folio? How much spare capacity does your portfolio have for additional 
investments? (That is, do you have enough spare cash to increase the size 
of this investment by selling more puts at the new market price or buying 
shares of stock? And if so, would your portfolio be weighted too heavily on a 
single industry or sector?) By answering these questions and understanding 
how this presently losing investment compares with other existing or poten-
tial investments should govern your portfolio management of the position.
An investor cannot change the price at which he or she transacted 
in a security. The best he or she can do is to develop a rational view of the 
value of a security and judge that security by its relative merit versus other 
possible investments. Whether you ever make an option transaction, this 
is a good rule to keep in mind.
Let us now take a look at short calls and short-call spreads—the 
strategy used for accepting upside exposure.
Short Call (Call Spread)
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