222  •   The Intelligent Option Investor
indicate on your statements that a certain proportion of your account effec-
tively will be treated as margin. This means that you stand to receive the eco-
nomic benefit from your diversified portfolio of securities but will not be able 
to liquidate all of it. If the market climbs higher, a larger proportion of your 
portfolio will be considered as margin; if it falls lower, a smaller proportion 
of your portfolio will be considered as margin. Basically, a proportion of any 
gains from your diversified stock portfolio will be reapportioned to serve as 
collateral for your short call when the market is rising, and a proportion of any 
losses from your diversified stock portfolio will be offset by a freeing of margin 
related to your profits on the short call when the market is falling.
Most brokers restrict the ability of individual investors to write un-
covered calls on individual stocks, so the rest of this discussion will cover 
the short-call spread strategy for individual stocks.
T enor Selection
Tenors for short-call spreads should be fairly short under the same reason-
ing as that for short puts—one receives more time value per day for short-
er-tenor options. Look for calls in the three- to nine-month tenor range. 
The tenor of the purchased call (at the higher strike price) should be the 
same as the tenor of the sold calls (at the lower strike price). Theoretically, 
the bought calls could be longer, but it is hard to think of a valuation justifi-
cation for such a structure. By buying a longer-tenor call for the upside leg 
of the investment, you are expressing an investment opinion that the stock 
will likely rise over the long term—this exactly contradicts the purpose of 
this strategy: expressing a bearish investment opinion.
Strike Price Selection
Theoretically, you can choose any two strike prices, sell the call at the lower 
price, and buy the call at the higher price and execute this investment. If you 
sold an ITM call, you would receive premium that consists of both time and 
intrinsic value. If the stock fell by expiration, you would realize all the wasted 
time value plus the difference between the intrinsic value at initiation and the 
intrinsic value at expiration.
Despite the theory, however, in practice, the lower strike option is usually 
sold ATM or OTM because of the threat of assignment. Assignment is the pro-
cess the exchange goes through when investors choose to exercise the option