Chpter 3: Call Buying 107 
away that portion of the option's price as expiration approaches. However, when an 
option has a considerable amount of time remaining until its expiration, the more 
important component of the option value is really volatility. If traders expect the 
underlying stock to be volatile, the option will be expensive; if they expect the oppo­
site, the option will be cheap. This expensiveness and cheapness is reflected in the 
portion of the option that is not intrinsic value. For example, a six-month option will 
not decay much in one day's time, but a quick change in volatility expectations by 
option traders can heavily affect the price of the option, especially one with a good 
deal of time remaining. So an option buyer should carefully assess his purchases, not 
just view them as something that will waste away. With careful analysis, option buy­
ers can do very well, if they consider what can happen during the life of the option, 
and not merely what will happen at expiration. 
CALL BUYERS' FRUSTRATIONS 
Despite one's best efforts, it may often seem that one does not make much money 
when a fairly volatile stock makes a quick move of 3 or 4 points. The reasons for this 
are somewhat more complex than can be addressed at this time, although they relate 
strongly to delta, time decay, and the volatility of the underlying stock. They are dis­
cussed in Chapter 36, 'The Basics of Volatility Trading." If one plans to conduct a 
serious call buying strategy, he should read that chapter before embarking on a pro­
gram of extensive call buying. 
FOLLOW-UP ACTION 
The simplest follow-up action that the call buyer can implement when the underly­
ing stock drops is to sell his call and cut his losses. There is often a natural tendency 
to hold out hope that the stock can rally back to or above the striking price. Most of 
the time, the buyer does best by cutting his losses in situations in which the stock is 
performing poorly. He might use a "mental" stop price or could actually place a sell 
stop order, depending on the rules of the exchange where the call is traded. In gen­
eral, stop orders for options result in poor executions, so using a "mental" stop is bet­
ter. That is, one should base his exit point on the technical pattern of the underlying 
stock itself. If it should break down below support, for example, then the option 
holder should place a market (not held) order to sell his call option. 
If the stock should rise, the buyer should be willing to take profits as well. Most 
buyers will quite readily take a profit if, for example, a call that was bought for 5 
points had advanced to be worth 10 points. However, the same investor is often