120 
FIGURE 4-1. 
Protected short sale. 
C: 
0 .:; 
~ 
'a.. X 
UJ 
1o +$0 en en 
0 
...J 
0 
-e 
0.-$300 
40' 
', 
Stock Price at Expiration 
' 
Part II: Call Option Strategies 
43 
', ', ' ', ' ', 
Short ', 
' Sale 'll 
5½ points - the five points between the current stock price of 40 and the striking 
price of 45, plus the amount paid for the call. On the other hand, if XYZ declines, the 
protected short seller will make nearly as much as the short seller who did not pro­
tect, since he only spent ½ point for the long call. 
If one buys an in-the-nwney call as protection for the short sale, his risk will be 
quite minimal. However, his profit potential will be severely limited. As an example, 
with XYZ at 40, if one had purchased a July 35 call at 5½, his risk would be limited 
to½ point anywhere above 35 at July expiration. Unfortunately, he would not realize 
any profit on the position until the stock went below 34½, a drop of 5½ points. This 
is too much protection, for it limits the profit so severely that there is only a small 
hope of making a profit. 
Generally, it is best to buy a call that is at-the-nwney or only slightly out-of the­
money as the protection for the short sale. It is not of much use to buy a deeply out­
of-the-money call as protection, since it does very little to moderate risk unless the 
stock climbs quite dramatically. Normally, one would cover a short sale before it went 
heavily against him. Thus, the money spent for such a deeply out-of-the-money call 
is wasted. However, if one wants to give a short sale plenty of room to "work" and