Gapter 3: Call Buying 
TABLE 3-1. 
Present situation on XYZ October calls. 
Original Trade 
XYZ common: 48 
Bought XYZ October 50 at 3 
109 
Current Prices 
XYZ Common: 58 
XYZ October 50: 9 
XYZ October 60: 3 
Each of these actions would produce different levels of risk and reward from 
this point forward. If the holder sells the October 50 call, he makes a 6-point profit, 
less commissions, and terminates the position. He can realize no further appreciation 
from the call, nor can he lose any of his current profits; he has realized a 6-point gain. 
This is the least aggressive tactic of the four: If the underlying stock continues to 
advance and rises above 63, any of the other three strategies will outperform the 
complete liquidation of the call. However, if the underlying stock should instead 
decline below 50 by expiration, this action would have provided the most profit of the 
four strategies. 
The other simple tactic, the fourth one listed, is to do nothing. If the call is then 
held to expiration, this tactic would be the riskiest of the four: It is the only one that 
could produce a loss at expiration if XYZ fell back below 50. However, if the under­
lying stock continues to rise in price, more profits would accrue on the call. Every call 
buyer realizes the ramifications of these two tactics - liquidating or doing nothing 
and is generally looking for an alternative that might allow him to reduce some of his 
risk without cutting off his profit potential completely. The remaining two tactics are 
geared to this purpose: limiting the total risk while providing the opportunity for fur­
ther profits of an amount greater than those that could be realized by liquidating. 
The strategy in which the holder sells the call that he is currently holding, the 
October 50, and uses part of the proceeds to buy the call at the next higher strike is 
called rolling up. In this example, he could sell the October 50 at 9, pocket his initial 
3-point investment, and use the remaining proceeds to buy two October 60 calls at 3 
points each. Thus, it is sometimes possible for the speculator to recoup his entire 
original investment and still increase the number of calls outstanding by rolling up. 
Once this has been done, the October 60 calls will represent pure profits, whatever 
their price. The buyer who "rolls up" in this rrwnner is essentially speculating with 
someone else's money. He has put his own money back in his pocket and is using 
accrued profits to attempt to realize further gains. At expiration, this tactic would 
perform best if XYZ increased by a substantial amount. This tactic turns out to be the