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+Chapter 2: Covered CaH Writing 89 
+Note that, in either case, the same call - the July 50 -would be written. The use of 
+the convertible as the underlying security does not alter the choice of which option to 
+use. To make the comparison of returns easier, commissions are ignored in the cal­
+culations given in Table 2-25. In reality, the commissions for the stock purchase, 
+either common or preferred, would be very similar. Thus, from a numerical point of 
+view, it appears to be more advantageous to write against the convertible than against 
+the common. 
+TABLE 2-25. 
+Comparison of common and convertible writes. 
+Write against Common Write against Convertible 
+Buy underlying security $5,000(100 XYZ) $5,360 (67 XYZ CV Pfd A) 
+Sell one July 50 call 500 - 500 
+Net cash investment $4,500 $4,860 
+Premium collected $ 500 $ 500 
+Dividends until July 50 250 
+Maximum profit potential $ 550 $ 750 
+Return (profit divided by 
+investment) 12.2% 15.4% 
+When writing against a convertible security, additional considerations should be 
+looked at. The first is the premium of the convertible security. In the example, with 
+XYZ selling at 50, the XYZ cv Pfd A has a true value of 1.5 times 50, or $75 per share. 
+However, it is selling at 80, which represents a premium of 5 points above its com­
+puted value of 75. Normally, one would not want to buy a convertible security if the 
+premium is too large. In this example, the premium appears quite reasonable. Any 
+convertible premium greater than 15% above computed value might be considered 
+to be too large. 
+Another consideration when writing against convertible securities is the han­
+dling of assignment. If the writer is assigned, he may either (1) convert his preferred 
+stock into common and deliver that, or (2) sell the preferred in the market and use 
+the proceeds to buy 100 shares of common stock in the market for delivery against 
+the assignment notice. The second choice is usually preferable if the convertible 
+security has any premium at all, since converting the preferred into common causes 
+the loss of any premium in the convertible, as well as the loss of accrued interest in 
+the case of a convertible bond.