Chpter 3: Call Buying 117 
not rally by October, he has decreased his overall loss by the amount received for the 
sale of the July 35 call. 
This strategy is not as attractive to use as the previous one. If XYZ should rally 
before July expiration, the investor might find himself with two losing positions. For 
example, suppose that XYZ rallied back to 36 in the next week. His short call that he 
sold for 1 point would be selling for something more than that, so he would have an 
unrealized loss on the short July 35. In addition, the October 35 would probably not 
have appreciated back to its original price of 3, and he would therefore have an unre­
alized loss on that side of the spread as well. 
Consequently, this strategy should be used with great caution, for if the under­
lying stock rallies quickly before the near-term expiration, the spread could be at a 
loss on both sides. Note that in the former spread strategy, this could not happen. 
Even if XYZ rallied quickly, some profit would be made on the rebound. 
A FURTHER COMMENT ON SPREADS 
Anyone not familiar with the margin requirements for spreads, under both the 
exchange margin rules and the rules of the brokerage firm he is dealing with, should 
not attempt to utilize a spread transaction. Later chapters on spreads outline the 
more common requirements for spread transactions. In general, one must have a 
margin account to establish a spread and must have a minimum amount of equity in 
the account. Thus, the call buyer who operates in a cash account cannot necessarily 
use these spread strategies. To do so might incur a margin call and possible restric­
tion of one's trading account. Therefore, check on specific requirements before uti­
lizing a spread strategy. Do not assume that a long call can automatically be "rolled" 
into any sort of spread.