Oapter 2: Covered Call Writing 
TABLE 2-4. 
Return if exercised-cash account. 
Stock sale proceeds (500 shares at 45) 
Less stock sale commissions 
Plus dividends earned until expiration 
Less net investment 
Net profit if exercised 
Return if exercised $2,290 = 11 2o/c 
$20,380 . 
0 
TABLE 2-5. 
Return if unchanged-cash account. 
Unchanged stock value (500 shares at 43) 
Plus dividends 
Less net investment 
Profit if unchanged 
Return if unchanged $1,620 = 7.9'¼ 
$20,380 ° 
+ 
$22,500 
330 
500 
- 20,380 
$ 2,290 
$21,500 
+ 500 
- 20,380 
$ 1,620 
49 
return if unchanged - also called the static return and sometimes incorrectly referred 
to as the "expected return." Again, one first calculates the profit and then calculates 
the return by dividing the profit by the net investment. An important point should be 
made here: There is no stock sale commission included in Table 2-5. This is the most 
common way of calculating the return if unchanged; it is done this way because in a 
majority of cases, one would continue to hold the stock if it were unchanged and 
would write another call option against the same stock. Recall again, though, that if 
the written call is in-the-rrwney, the return if unchanged is the same as the return if 
exercised. Stock sale commissions must therefore be included in that case. 
Once the necessary returns have been computed and the writer has a feeling for 
how much money he could make in the covered write, he next computes the exact 
downside break-even point to determine what kind of downside protection the writ­
ten call provides (Table 2-6). The total return concept of covered writing necessitates 
viewing both potential income and downside protection as important criteria for 
selecting a writing position. If the stock were held to expiration and the $500 in div­
idends received, the writer would break even at a price of 39.8. Again, a stock sale 
commission is not generally included in the break-even point computation, because