86 Part II: Call Option Strategies 
AVOIDING THE UNCOVERED POSITION 
There is a margin rule that the covered writer must be aware of if he is considering 
taking any sort of follow-up action on the day that the written call ceases trading. If 
another call is sold on that day, even though the written call is obviously going to 
expire worthless, the writer will be considered uncovered for margin purposes over 
the weekend and will be obligated to put forth the collateral for an uncovered option. 
This is usually not what the writer intends to do; being aware of this rule will elimi­
nate unwanted margin calls. Furthermore, uncovered options may be considered 
unsuitable for many covered writers. 
Example: A customer owns XYZ and has January 20 calls outstanding on the last day 
of trading of the January series (the third Friday of January; the calls actually do not 
expire until the following day, Saturday). IfXYZ is at 15 on the last day of trading, the 
January 20 call will almost certainly expire worthless. However, should the writer 
decide to sell a longer-term call on that day without buying back the January 20, he 
will be considered uncovered over the weekend. Thus, if one plans to wait for an 
option to expire totally worthless before writing another call, he must wait until the 
Monday after expiration before writing again, assuming that he wants to remain cov­
ered. The writer should also realize that it is possible for some sort of news item to 
be announced between the end of trading in an option series and the actual expira­
tion of the series. Thus, call holders might exercise because they believe the stock will 
jump sufficiently in price to make the exercise profitable. This has happened in the 
past, two of the most notable cases being IBM in January 1975 and Carrier Corp. in 
September 1978. 
WHEN TO LET STOCK BE CALLED AWAY 
Another alternative that is open to the writer as the written call approaches expira­
tion is to let the stock be called away if it is above the striking price. In many cases, 
it is to the advantage of the writer to keep rolling options forward for credits, there­
by retaining his stock ownership. However, in certain cases, it may be advisable to 
allow the stock to be called away. It should be emphasized that the writer often has 
a definite choice in this matter, since he can generally tell when the call is about to 
be exercised - when the time value premium disappears. 
The reason that it is normally desirable to roll forward is that, over time, the 
covered writer will realize a higher return by rolling instead of being called. The 
option commissions for rolling forward every three or six months are smaller than the 
commissions for buying and selling the underlying stock every three or six months, 
and therefore the eventual return will be higher. However, if an inferior return has