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+Chapter 2: Covered Call Writing 71 
+1. protective action to take if the stock drops, 
+2. aggressive action to take when the stock rises, or 
+3. action to avoid assignment if the time premium disappears from an in-the-money 
+call. 
+There may be times when one decides to close the entire position before expiration 
+or to let the stock be called away. These cases are discussed as well. 
+PROTECTIVE ACTION IF THE UNDERLYING STOCK DECLINES IN PRICE 
+The covered writer who does not take protective action in the face of a relatively sub­
+stantial drop in price by the underlying stock may be risking the possibility of large 
+losses. Since covered writing is a strategy with limited profit potential, one should 
+also take care to limit losses. Otherwise, one losing position can negate several win­
+ning positions. The simplest form of follow-up action in a decline is to merely close 
+out the position. This might be done if the stock declines by a certain percentage, or 
+if the stock falls below a technical support level. Unfortunately, this method of defen­
+sive action may prove to be an inferior one. The investor will often do better to con­
+tinue to sell more time value in the form of additional option premiums. 
+Follow-up action is generally taken by buying back the call that was originally 
+written and then writing another call, with a different striking price and/or expiration 
+date, in its place. Any adjustment of this sort is referred to as a rolling action. When 
+the underlying stock drops in price, one generally buys back the original call - pre­
+sumably at a profit since the underlying stock has declined - and then sells a call with 
+a lower striking price. This is known as rolling down, since the new option has a lower 
+striking price. 
+Example: The covered writing position described as "buy XYZ at 51, sell the XYZ 
+January 50 call at 6" would have a maximum profit potential at expiration of 5 points. 
+Downside protection is 6 points down to a stock price of 45 at expiration. These fig­
+ures do not include commissions, but for the purposes of an elementary example, the 
+commissions will be ignored. 
+If the stock begins to decline in price, taking perhaps two months to fall to 45, 
+the following option prices might exist: 
+XYZ common, 45; 
+XYZ January 50 call, l; and 
+XYZ January 45 call, 4.