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+74 Part II: Call Option Strategies 
+with enough premium to realize any profit if the stock were then called away at expi­
+ration. These situations arise more commonly on lower-priced stocks, where the 
+striking prices are relatively far apart in percentage terms. Out-of-the-money writes 
+are more susceptible to this problem than are in-the-money writes. Although it is not 
+emotionally satisfying to be in an investment position that cannot produce a profit -
+at least for a limited period of time - it may still be beneficial to roll down to protect 
+as much of the stock price decline as possible. 
+Example: For the covered write described as "buy XYZ at 20, sell the January 20 call 
+at 2," the stock unexpectedly drops very quickly to 16, and the following prices exist: 
+XYZ common, 16; 
+XYZ January 20 call,½; and 
+XYZ January 15 call, 2½. 
+The covered writer is faced with a difficult choice. He currently has an unrealized 
+loss of 2½ points - a 4-point losson the stock which is partially offset by a 1 ½-point 
+gain on the January 20 call. This represents a fairly substantial percentage loss on his 
+investment in a short period of time. He could do nothing, hoping for the stock to 
+recover its loss. Unfortunately, this may prove to be wishful thinking. 
+If he considers rolling down, he will not be excited by what he sees. Suppose 
+that the writer wants to roll down from the January 20 to the January 15. He would 
+thus buy the January 20 at ½ and sell the January 15 at 2½, for a net credit of 2 
+points. By rolling down, he is obligating himself to sell his stock at 15, the striking 
+price of the January 15 call. Suppose XYZ were above 15 in January and were called 
+away. How would the writer do? He would lose 5 points on his stock, since he origi­
+nally bought it at 20 and is selling it at 15. This 5-point loss is substantially offset by 
+his option profits, which amount to 4 points: 1 ½ points of profit on the January 20, 
+sold at 2 and bought back at ½, plus the 2½ points received from the sale of the 
+January 15. However, his net result is a 1-point loss, since he lost 5 points on the stock 
+and made only 4 points on the options. Moreover, this 1-point loss is the best that he 
+can hope for! This is true because, as has been demonstrated several times, a covered 
+writing position makes its maximum profit anywhere above the striking price. Thus, 
+by rolling down to the 15 strike, he has limited the position severely, to the extent of 
+"locking in a loss." 
+Even considering what has been shown about this loss, it is still correct for this 
+writer to roll down to the January 15. Once the stock has fallen to 16, there is noth­
+ing anybody can do about the unrealized losses. However, if the writer rolls down, he 
+can prevent the losses from accumulating at a faster rate. In fact, he will do better by