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+394 Part Ill: Put Option Strategies 
+Downside Protection. The actual downside break-even point might enter into 
+one's thinking as well. A downside break-even point of 40.3 is available by using the 
+LEAPS write, and that is a known quantity. No matter how far XYZ might fall, as long 
+as it can recover to slightly over 40 by expiration two years from now, the investment 
+will at least break even. A problem arises if XYZ falls to 40 quickly. If that happened, 
+the LEAPS call would still have a significant amount of time value premium remain­
+ing on it. Thus, if the investor attempted to sell his stock at that time and buy back 
+his call, he would have a loss, not a break-even situation. 
+The short-term write offers downside protection only to a stock price of 46.2. 
+Of course, repeated writes of 6-month calls over the next 2 years would lower the 
+break-even point below that level. The problem is that if XYZ declines and one is 
+forced to keep selling 6-month calls every 6 months, he may be forced to use a lower 
+striking price, thereby locking in a smaller profit ( or possibly even a loss) if premium 
+levels shrink. The concepts of rolling down are described in detail in Chapter 2. 
+A further word about rolling down may be in order here. Recall that rolling 
+down means buying back the call that is currently written and selling another one 
+with a lower striking price. Such action always reduces the profitability of the over­
+all position, although it may be necessary to prevent further downside losses if the 
+common stock keeps declining. Now that LEAPS are available, the short-term writer 
+faced with rolling down may look to the LEAPS as a means of bringing in a healthy 
+premium even though he is rolling down. It is true that a large premium could be 
+brought into the account. But remember that by doing so, one is committing himself 
+to sell the stock at a lower price than he had originally intended. This is why the 
+rolling down reduces the original profit potential. If he rolls down into a LEAPS call, 
+he is reducing his maximum profit potential for a longer period of time. 
+Consequently, one should not always roll dm,vn into an option with a longer maturi­
+ty. Instead, he should carefully analyze whether he wants to be committed for an 
+even longer time to a position in which the underlying common stock is declining. 
+To summarize, the large absolute premiums available in LEAPS calls may make 
+a covered write of those calls seem unusually attractive. However, one should calcu­
+late the returns available and decide whether a short-term write might not serve his 
+purpose as well. Even though the large LEAPS premium might reduce the initial 
+investment to a mere pittance, be aware that this creates a great amount of leverage, 
+and leverage can be a dangerous thing. 
+The large amount of downside protection offered by the LEAPS call is real, but 
+if the stock falls quickly, there would definitely be a loss at the calculated downside 
+break-even point. Finally, one cannot always roll down into a LEAPS call if trouble 
+develops, because he will be committing himself for an even longer period of time to 
+sell his stock at a lower price than he had originally intended.