92 Part II: Call Option Strategies 
The basic strategy involves, as an initial step, selecting the target price at which 
the writer is willing to sell his stock. 
Example: A customer owns 1,000 shares of XYZ, which is currently at 60, and is will­
ing to sell the stock at 80. In the meantime, he would like to realize a positive cash 
flow from writing options against his stock. This positive cash flow does not neces­
sarily result in a realized option gain until the stock is called away. Most likely, with 
the stock at 60, there would not be options available with a striking price of 80, so one 
could not write 10 July 80's, for example. This would not be an optimum strategy 
even if the July 80's existed, for the investor would be receiving so little in option pre­
miums - perhaps 10 cents per call - that writing might not be worthwhile. The incre­
mental return strategy allows this investor to achieve his objectives regardless of the 
existence of options with a higher striking price. 
The foundation of the incremental return strategy is to write against only a part 
of the entire stock holding initially, and to write these calls at the striking price near­
est the current stock price. Then, should the stock move up to the next higher strik­
ing price, one rolls up for a credit by adding to the number of calls written. Rolling 
for a credit is mandatory and is the key to the strategy. Eventually, the stock reaches 
the target price and the stock is called away, the investor sells all his stock at the tar­
get price, and in addition earns the total credits from all the option transactions. 
Example: XYZ is 60, the investor owns 1,000 shares, and his target price is 80. One 
might begin by selling three of the longest-term calls at 60 for 7 points apiece. Table 
2-26 shows how a poor case - one in which the stock climbs directly to the target 
price - might work. As Table 2-26 shows, if XYZ rose to 70 in one month, the three 
original calls would be bought back and enough calls at 70 would be sold to produce 
a credit - 5 XYZ October 70's. If the stock continued upward to 80 in another month, 
the 5 calls would be bought back and the entire position - 10 calls - would be writ­
ten against the target price. 
If XYZ remains above 80, the stock will be called away and all 1,000 shares will 
be sold at the target price of 80. In addition, the investor will earn all the option cred­
its generated along the way. These amount to $2,800. Thus, the writer obtained the 
full appreciation of his stock to the target price plus an incremental, positive return 
from option writing. 
In a flat market, the strategy is relatively easy to monitor. If a written call loses 
its time value premium and therefore might be subject to assignment, the writer can 
roll forward to a more distant expiration series, keeping the quantity of written calls 
constant. This transaction would generate additional credits as well.