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+Cl,apter 2: Covered Call Writing 53 
+the return from cash. The farther out-of-the-money that the written call is, the big­
+ger the discrepancy between cash and margin returns will be when the return if exer­
+cised is computed. 
+As with the computation for return if exercised for a write on margin, the return 
+if unchanged calculation is similar for cash and margin also. The only difference is the 
+subtraction of the margin interest charges from the profit. The return if unchanged is 
+also higher for a margin write, provided that there is enough option premium to com­
+pensate for the margin interest charges. The return if unchanged in the cash example 
+was 7.9% versus 11.4% for the margin write. In general, the farther from the strike in 
+either direction - out-of-the-money or in-the-money - the less the return if 
+unchanged on margin will exceed the cash return if unchanged. In fact, for deeply out­
+of-the-money or deeply in-the-money calls, the return if unchanged will be higher on 
+cash than on margin. Table 2-11 shows that the break-even point on margin, 40.9, is 
+higher than the break-even point from a cash write, 39.8, because of the margin inter­
+est charges. Again, the percent downside protection can be computed as shown in 
+Table 2-12. Obviously, since the break-even point on margin is higher than that on 
+cash, there is less percent downside protection in a margin covered write. 
+One other point should be made regarding a covered write on margin: The bro­
+kerage firm will loan you only half of the strike price amount as a maximum. Thus, it 
+is not possible, for example, to buy a stock at 20, sell a deeply in-the-money call struck 
+at 10 points, and trade for free. In that case, the brokerage firm would loan you only 
+5 - half the amount of the strike. 
+Even so, it is still possible to create a covered call write on margin that has little or 
+even zero margin .requirement. For example, suppose a stock is selling at 38 and that a 
+long-term LEAPS option struck at 40 is selling for 19. Then the margin requirement is 
+zero! This does not mean you're getting something for free, however. True, your invest­
+ment is zero, but your risk is still 19 points. Also, your broker would ask for some sort of 
+minimum margin to begin with and would of course ask for maintenance margin if the 
+underlying stock should fall in price. Moreover, you would be paying margin interest all 
+during the life of this long-term LEAPS option position. Leverage can be a good thing or 
+a bad thing, and this strategy has a great deal of leverage. So be careful if you utilize it. 
+COMPOUND INTEREST 
+The astute reader will have noticed that our computations of margin interest have 
+been overly simplistic; the compounding effect of interest rates has been ignored. 
+That is, since interest charges are normally applied to an account monthly, the 
+investor will be paying interest in the later stages of a covered writing position not 
+only on the original debit, but on all previous monthly interest charges. This effect is 
+described in detail in a later chapter on arbitrage techniques. Briefly stated, rather