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+Chapter 2: Covered Call Writing 47 
+basis. If the write were done in a margin account, the return would be considerably 
+higher. 
+Note that we have ignored dividends paid by the underlying stock and commis­
+sion charges, factors that are discussed in detail in the next section. Also, one should 
+be aware that if he is looking at an annualized return from a covered write, there is 
+no guarantee that such a return could actually be obtained. All that is certain is that 
+the writer could make 8% in 9 months. There is no guarantee that 9 months from 
+now, when the call expires, there will be an equivalent position to establish that will 
+extend the same return for the remainder of the annualization period. Annual returns 
+should be used only for comparative purposes between covered writes. 
+The writer has a position that has an annualized return (for comparative pur­
+poses) of over 10% and 8 points of downside protection. Thus, the total position is an 
+investment that will not lose money unless XYZ common stock falls by more than 8 
+points, or about 18%; and is an investment that could return the equivalent of 10% 
+annually should XYZ common stock rise, remain the same, or fall by 5 points (to 40). 
+This is a conservative position. Even if XYZ itself is not a conservative stock, the 
+action of writing this option has made the total position a conservative one. The only 
+factor that might detract from the conservative nature of the total position would be 
+if XYZ were so volatile that it could easily fall more than 8 points in 9 months. 
+In a strategic sense, the total position described above is better and more con­
+servative than one in which a writer buys a conservative stock -yielding perhaps 6 or 
+7% - and writes an out-of-the-money call for a minimal premium. If this conserva­
+tive stock were to fall in price, the writer would be in danger of being in a loss situa­
+tion, because here the option is not providing anything more than the most minimal 
+downside protection. As was described earlier, a high-yielding, low-volatility stock 
+will not have much time premium in its in-the-money options, so that one cannot 
+effectively establish an in-the-money write on such a "conservative" stock. 
+COMPUTING RETURN ON INVESTMENT 
+Now that the reader has some general feeling for covered call writing, it is time to 
+discuss the specifics of computing return on investment. One should always know 
+exactly what his potential returns are, including all costs, when he establishes a cov­
+ered writing position. Once the procedure for computing returns is clear, one can 
+more logically decide which covered writes are the most attractive. 
+There are three basic elements of a covered write that should be computed 
+before entering into the position. The first is the return if exercised. This is the return 
+on investment that one would achieve if the stock were called away. For an out-of-the-