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+72 Part II: Call Option Strategies 
+• 
+The covered writer of the January 50 would, at this time, have a small unrealized loss 
+of one point in his overall position: His loss on the common stock is 6 points, but he 
+has a 5-point gain in the January 50 call. (This demonstrates that prior to expiration, 
+a loss occurs at the "break-even" point.) If the stock should continue to fall from 
+these levels, he could have a larger loss at expiration. The call, selling for one point, 
+only affords one more point of downside protection. If a further stock price drop is 
+anticipated, additional downside protection can be obtained by rolling down. In this 
+example, if one were to buy back the January 50 call at 1 and sell the January 45 at 
+4, he would be rolling down. This would increase his protection by another three 
+points - the credit generated by buying the 50 call at 1 and selling the 45 call at 4. 
+Hence, his downside break-even point would be 42 after rolling down. 
+Moreover, if the stock were to remain unchanged - that is, if XYZ were exactly 
+45 at January expiration - the writer would make an additional $300. If he had not 
+rolled down, the most additional income that he could make, if XYZ remained 
+unchanged, would be the remaining $100 from the January 50 call. So rolling down 
+gives more downside protection against a further drop in stock price and may also 
+produce additional income if the stock price stabilizes. 
+In order to more exactly evaluate the overall effect that was obtained by rolling 
+down in this example, one can either compute a profit table (Table 2-21) or draw a 
+net profit graph (Figure 2-3) that compares the original covered write with the 
+rolled-down position. 
+Note that the rolled-down position has a smaller maximum profit potential than 
+the original position did. This is because, by rolling down to a January 45 call, the 
+writer limits his profits anywhere above 45 at expiration. He has committed himself 
+to sell stock 5 points lower than the original position, which utilized a January 50 call 
+and thus had limited profits above 50. Rolling down generally reduces the maximum 
+TABLE 2·21. 
+Profit table. 
+XYZ Price at Profit from Profit from 
+Expiration January 50 Write Rolled Position 
+40 -$500 -200 
+42 - 300 0 
+45 0 +300 
+48 + 300 +300 
+50 + 500 +300 
+60 + 500 +300