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+88 Part II: Call Option Strategies 
+return concept - is described that has great appeal to large stockholders, both indi­
+viduals and institutions. 
+COVERED WRITING AGAINST A CONVERTIBLE SECURITY 
+It may be more advantageous to buy a security that is convertible into common stock 
+than to buy the stock itself, for covered call writing purposes. Convertible bonds and 
+convertible preferred stocks are securities commonly used for this purpose. One 
+advantage of using the convertible security is that it often has a higher yield than does 
+the common stock itself. 
+Before describing the covered write, it may be beneficial to review the basics of 
+convertible securities. Suppose XYZ common stock has an XYZ convertible Preferred 
+A stock that is convertible into 1.5 shares of common. The number of shares of com­
+mon that the convertible security converts into is an important piece of information 
+that the writer must know. It can be found in a Standard & Poor's Stock Guide (or 
+Bond Guide, in the case of convertible bonds). 
+The writer also needs to determine how many shares of the convertible securi­
+ty must be owned in order to equal 100 shares of the common stock. This is quickly 
+determined by dividing 100 by the conversion ratio - 1.5 in our XYZ example. Since 
+100 divided by 1.5 equals 66.666, one must own 67 shares of XYZ cv Pfd A to cover 
+the sale of one XYZ option for 100 shares of common. Note that neither the market 
+prices of XYZ common nor the convertible security are necessary for this computa­
+tion. 
+When using a convertible bond, the conversion information is usually stated in 
+a form such as, "converts into 50 shares at a price of 20." The price is irrelevant. What 
+is important is the number of shares that the bond converts into - 50 in this case. 
+Thus, if one were using these bonds for covered writing of one call, he would need 
+two (2,000) bonds to own the equivalent of 100 shares of stock. 
+Once one knows how much of the convertible security must be purchased, he 
+can use the actual prices of the securities, and their yields, to determine whether a 
+covered write against the common or the convertible is more attractive. 
+Example: The following information is known: 
+XYZ common, 50; 
+XYZ CV Pfd A, 80; 
+XYZ July 50 call, 5; 
+XYZ dividend, 1.00 per share annually; and 
+XYZ cv Pfd A dividend, 5.00 per share annually.