122 Part II: Call Option Strategies 
FOLLOW-UP ACTION 
There is little that the protected short seller needs to perform in the way of follow­
up action in this strategy, other than closing out the position. If the underlying stock 
moves down quickly and it appears that it might rebound, the short sale could be cov­
ered without selling the long call. In this manner, one could potentially profit on the 
call side as well if the stock came back above the original striking price. If the under­
lying stock rises in price, a similar strategy of taking off only the profitable call side 
of the transaction is not recommended. That is, if XYZ climbed from 40 to 50 and the 
July 40 call also rose from 3 to 10, it is not advisable to take the 7-point profit in the 
call, hoping for a drop in the stock price. The reason for this is that one is entering 
into a highly risk-oriented situation by removing his protection when the call is in­
the-money. Thus, when the stock drops, it is all right - perhaps even desirable - to 
take the profit, because there is little or no additional risk if the stock continues to 
drop. However, when the stock rises, it is not an equivalent situation. In that case, if 
the short seller sells his call for a profit and the stock subsequently rises even further, 
large losses could result. 
It may often be advisable to close the position if the call is at or near parity, 
in-the-money, by exercising the call. In most strategies, the option holder has no 
advantage in exercising the call because of the large dollar difference between 
stock commissions and option commissions. However, in the protected short sale 
strategy, the short seller is eventually going to have to cover the short stock in any 
case and incur the stock commission by so doing. It may be to his advantage to 
exercise the call and buy his stock at the striking price, thereby buying stock at a 
lower price and perhaps paying a slightly lower commission amount. 
Example: XYZ rises to 50 from the original short sale price of 40, and the XYZ July 
40 call is selling at 10 somewhere close to expiration. The position could be liquidat­
ed by either (1) buying the stock back at 50 and selling the call at 10, or (2) exercis­
ing the call to buy stock at 40. In the first case, one would pay a stock commission at 
a price of $50 per share plus an option commission on a $10 option. In the second 
case, the only commission would be a stock commission at the price of $40 per share. 
Since both actions accomplish the same end result - closing the position entirely for 
40 points plus commissions - clearly the second choice is less costly and therefore 
more desirable. Of course, if the call has time value premium in it of an amount 
greater than the commission savings, the first alternative should be used.