400 Part Ill: Put Option Strategies 
The overriding reason that most strategists sell naked calls is to collect the time 
premium before the stock can rise above the striking price. These strategists gener­
ally have an opinion about the stock's direction, believing that it is perhaps trapped 
in a trading range or even headed lower over the short term. This strategy does not 
lend itself well to using LEAPS, since it would be difficult to project that the stock 
would remain below the strike for so long a period of time. 
Short LEAPS Instead of Short Stock. Another reason that naked calls are 
sold is as a strategy akin to shorting the common stock. In this case, in-the-money 
calls are sold. The advantages are threefold: 
l. The amount of collateral required to sell the call is less than that required to sell 
stock short. 
2. One does not have to borrow an option in order to sell it short, although one must 
borrow common stock in order to sell it short. 
3. An uptick is not required to sell the option, but one is required in order to sell 
stock short. 
For these reasons, one might opt to sell an in-the-money call instead of shorting 
stock. 
The profit potentials of the two strategies are different. The short seller of stock 
has a very large profit potential if the stock declines substantially, while the seller of 
an in-the-money call can collect only the call premium no matter how far the stock 
drops. Moreover, the call's price decline will slow as the stock nears the strike. 
Another way to express this is to say that the delta of the call shrinks from a number 
close to l (which means the call mirrors stock movements closely) to something more 
like 0.50 at the strike (which means that the call is only declining half as quickly as 
the stock). 
Another problem that may occur for the call seller is early assignment, a topic 
that is addressed shortly. One should not attempt this strategy if the underlying stock 
is not borrowable for ordinary short sales. If the underlying stock is not available for 
borrowing, it generally means that extraneous forces are at work; perhaps there is a 
tender offer or exchange offer going on, or some form of convertible arbitrage is tak­
ing place. In any case, if the underlying stock is not borrowable, one should not be 
deluded into thinking that he can sell an in-the-money call instead and have a worry­
free position. In these cases, the call will normally have little or no time premium and 
may be subject to early assignment. If such assignment does occur, the strategist will 
become short the stock and, since it is not borrowable, will have to cover the stock. 
At the least, he will cost himself some commissions by this unprofitable strategy; and 
at worst, he will have to pay a higher price to buy back the stock as well.