142 Part II: Call Option Strategies 
this point, even if the stock did finally decline enough for the last set of calls to expire 
worthless, the overall strategy might still have been operated at a loss. 
Example: The basic strategy in the case of rising stock is shown in Table 5-3. Note 
that each transaction is a credit and that all ( except the last) involve taking a realized 
loss. 
This example assumes that the stock rose so quickly that a longer-term call was 
never available to roll into. That is, the October calls were always utilized. If there 
were a longer-term call available (the January series, for example), the writer should 
roll up and out as well. In this way, larger credits could be generated. The number of 
calls written increased from 5 to 15 and the collateral required as backing for the 
writing of the naked calls also increased heavily. Recall that the collateral require­
ment is equal to 20% of the stock price plus the call premium, less the amount by 
which the call is out-of-the-money. The premium may be used against the collateral 
requirements. Using the stock and call prices of the example above, the investment 
is computed in Table 5-4. While the number of written calls has tripled from 5 to 15, 
the collateral requirement has more than quadrupled from $5,000 to $21,000. This is 
why the investor must have ample collateral backing to utilize this strategy. The gen­
eral philosophy of the large investors who do apply this strategy is that they hope to 
eventually make a profit and, since they are using the collateral value of large securi­
ty positions already held, they are not investing any more money. The strategy does 
not really "cost" these investors anything. All profits represent additional income and 
do not in any way disturb the underlying security portfolio. Unfortunately, losses 
taken due to aborting the strategy could seriously affect the portfolio. This is why the 
investor must have sufficient collateral to carry through to completion. 
The sophisticated strategist who implements this strategy will generally do 
more rolling than that discussed in the simple example above. First, if the stock 
drops, the calls will be rolled down to the next strike - for a credit - in order to con­
stantly be selling the most time premium, which is always found in the longest-term 
at-the-money call. Furthermore, the strategist may want to roll out to a more distant 
expiration series whenever the opportunity presents itself. This rolling out, or for­
ward, action is only taken when the stock is relatively unchanged from the initial 
price and there is no need to roll up or down. 
This strategy seems ve:ry attractive as long as one has enough collateral backing. 
Should one use up all of his available collateral, the strategy could collapse, causing 
substantial losses. It may not necessarily generate large rates of return in rising mar­
kets, but in stable or declining markets the generation of additional income can be 
quite substantial. Since the investor is not putting up any additional cash but is uti-