Cl,apter 2: Covered Call Writing 57 
If one "legs" into the position - that is, buys the stock first and then attempts to 
sell the option, or vice versa - he is subjecting himself to a risk. 
Example: An investor wants to buy XYZ at 43 and sell the July 45 call at 3. Ifhe first 
sells the option at 3 and then tries to buy the stock, he may find that he has to pay 
more than 43 for the stock. On the other hand, if he tries to buy the stock first and 
then sell the option, he may find that the option price has moved down. In either case 
the writer will be accepting a lower return on his covered write. Table 2-16 demon­
strated how one's returns might be affected ifhe has to give up an eighth by "legging" 
into the position. 
ESTABLISHING A NET POSITION 
What the covered writer really wants to do is ensure that his net price is obtained. If 
he wants to buy stock at 43 and sell an option at 3, he is attempting to establish the 
position at 40 net. He normally would not mind paying 43.10 for the stock if he can 
sell the call at 3.10, thereby still obtaining 40 net. 
A "net" covered writing order must be placed with a brokerage firm because it 
is essential for the person actually executing the order to have full access to both the 
stock exchange and the option exchange. This is also referred to as a contingent 
order. Most major brokerage firms offer this service to their clients, although some 
place a minimum number of shares on the order. That is, one must write against at 
least 500 or 1,000 shares in order to avail himself of the service. There are, however, 
brokerage firms that will take net orders even for 100-share covered writes. Since the 
chances of giving away a dime are relatively great if one attempts to execute his own 
order by placing separate orders on two exchanges - stock and option - he should 
avail himself of the broker's service. Moreover, if his orders are for a small number of 
shares, he should deal with a broker who will take net orders for small positions. 
The reader must understand that there is no guarantee that a net order will be 
filled. The net order is always a "not held" order, meaning that the customer is not 
guaranteed an execution even if it appears that the order could be filled at prevailing 
market bids and offers. Of course, the broker will attempt to fill the order if it can 
reasonably be accomplished, since that is his livelihood. However, if the net order is 
slightly away from current market prices, the broker may have to "leg" into the posi­
tion to fill the order. The risk in this is the broker's responsibility, not the customer's. 
Therefore, the broker may elect not to take the risk and to report "nothing done" -
the order is not filled. 
If one buys stock at 43 and sells the call at 3, is the return really the same as buy­
ing the stock at 43.10 and selling the call at 3.10? The answer is, yes, the returns are