82 Part II: Call Option Strategies 
has amassed a fairly large series of debits from previous rolls; or (2) he begins to sell 
some out-of-the-money naked puts to bring in credits to reduce the cost of continu­
ally rolling the calls up for debits. This latter action is even worse, because the entire 
position is now leveraged tremendously, and a sharp drop in the stock price may 
cause horrendous losses - perhaps enough to wipe out the entire account. As fate 
would have it, these mistakes are usually made when the stock is near a top in price. 
Any price decline after such a dramatic rise is usually a sharp and painful one. 
The best way to avoid this type of potentially serious mistake is to allow the 
stock to be called away at some point. Then, using the funds that are released, either 
establish a new position in another stock or perhaps even utilize another strategy for 
a while. If that is not feasible, at least avoid making a radical change in strategy after 
the stock has had a particularly strong rise. Leveraging the position through naked 
put sales on top of rolling the calls up for debits should expressly be avoided. 
The discussion to this point has been directed at rolling up before expiration. At 
or near expiration, when the time value premium has disappeared from the written 
call, one may have no choice but to write the next-higher striking price if he wants to 
retain his stock. This is discussed when we analyze action to take at or near expiration. 
If the underlying stock rises, one's choices are not necessarily limited to rolling 
up or doing nothing. As the stock increases in price, the written call will lose its time 
premium and may begin to trade near parity. The writer may decide to close the posi­
tion himself - perhaps well in advance of expiration - by buying back the written call 
and selling the stock out, hopefully near parity. 
Example: A customer originally bought XYZ at 25 and sold the 6-month July 25 for 
3 points - a net of 22. Now, three months later, XYZ has risen to 33 and the call is 
trading at 8 (parity) because it is so deeply in-the-money. At this point, the writer may 
want to sell the stock at 33 and buy back the call at 8, thereby realizing an effective 
net of 25 for the covered write, which is his maximum profit potential. This is cer­
tainly preferable to remaining in the position for three more months with no more 
profit potential available. The advantage of closing a parity covered write early is that 
one is realizing the maximum return in a shorter period than anticipated. He is there­
by increasing his annualized return on the position. Although it is generally to the 
cash writer's advantage (margin writers read on) to take such action, there are a few 
additional costs involved that he would not experience if he held the position until 
the call expired. First, the commission for the option purchase (buy-back) is an addi­
tional expense. Second, he will be selling his stock at a higher price than the striking 
price, so he may pay a slightly higher commission on that trade as well. If there is a 
dividend left until expiration, he will not be receiving that dividend if he closes the