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+CHAPl'ER 2 
+Covered Call Writing 
+Covered call writing is the name given to the strategy by which one sells a call option 
+while simultaneously owning the obligated number of shares of underlying stock. 
+The writer should be mildly bullish, or at least neutral, toward the underlying stock. 
+By writing a call option against stock, one always decreases the risk of owning the 
+stock. It may even be possible to profit from a covered write if the stock declines 
+somewhat. However, the covered call writer does limit his profit potential and there­
+fore may not fully participate in a strong upward move in the price of the underlying 
+stock. Use of this strategy is becoming so common that the strategist must under­
+stand it thoroughly. It is therefore discussed at length. 
+THE IMPORTANCE OF COVERED CALL WRITING 
+COVERED CALL WRITING FOR DOWNSIDE PROTECTION 
+Example: An investor owns 100 shares of XYZ common stock, which is currently sell­
+ing at $48 per share. If this investor sells an XYZ July 50 call option while still hold­
+ing his stock, he establishes a covered write. Suppose the investor receives $300 from 
+the sale of the July 50 call. If XYZ is below 50 at July expiration, the call option that 
+was sold expires worthless and the investor earns the $300 that he originally received 
+for writing the call. Thus, he receives $300, or 3 points, of downside protection. That 
+is, he can afford to have the XYZ stock drop by 3 points and still break even on the 
+total transaction. At that time he can write another call option if he so desires. 
+Note that if the underlying stock should fall by more than 3 points, there will be 
+a loss on the overall position. Thus, the risk in the covered writing strategy material­
+izes if the stock falls by a distance greater than the call option premium that was orig­
+inally taken in. 
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