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+48 Part II: Call Option Strategies 
+money covered write, it is necessary for the stock to rise in price in order for the return 
+if exercised to be achieved. However, for an in-the-money covered write, the return if 
+exercised would be attained even if the stock were unchanged in price at option expi­
+ration. Thus, it is often advantageous to compute the return if unchanged - that is, the 
+return that would be realized if the underlying stock were unchanged when the option 
+expired. One can more fairly compare out-of-the-money and in-the-money covered 
+writes by using the return if unchanged, since no assumption is made concerning stock 
+price movement. The third important statistic that the covered writer should consid­
+er is the exact downside break-even point after all costs are included. Once this down­
+side break-even point is known, one can readily compute the percentage of downside 
+protection that he would receive from selling the call. 
+Example 1: An investor is considering the following covered write of a 6-month call: 
+Buy 500 XYZ common at 43, sell 5 XYZ July 45 calls at 3. One must first compute the 
+net investment required (Table 2-3). In a cash account, this investment consists of 
+paying for the stock in full, less the net proceeds from the sale of the options. Note 
+that this net investment figure includes all commissions necessary to establish the 
+position. (The commissions used here are approximations, as they vary from firm to 
+firm.) Of course, if the investor withdraws the option premium, as he is free to do, 
+his net investment will consist of the stock cost plus commissions. Once the neces­
+sary investment is known, the writer can compute the return if exercised. Table 2-4 
+illustrates the computation. One first computes the profit if exercised and then 
+divides that quantity by the net investment to obtain the return if exercised. Note 
+that dividends are included in this computation; it is assumed that XYZ stock will pay 
+$500 in dividends on the 500 shares during the life of the call. Moreover, all com­
+missions are included as well - the net investment includes the original stock pur­
+chase and option sale commissions, and the stock sale commission is explicitly listed. 
+For the return computed here to be realized, XYZ stock would have to rise in 
+price from its current price of 43 to any price above 45 by expiration. As noted ear­
+lier, it may be more useful to know what return could be made by the writer if the 
+stock did not move anywhere at all. Table 2-5 illustrates the method of computing the 
+TABLE 2-3. 
+Net investment required-cash account. 
+Stock cost (500 shares at 43) 
+Plus stock purchase commissions 
+Less option premiums received 
+Plus option sale commissions 
+Net cash investment 
++ 
+$21,500 
+320 
+1,500 
++ 60 
+$20,380