66 Part II: Call Option Strategies 
debit rather than let their "untouchable" stock be called away, just before the stock 
itself or the stock market collapsed. 
One should be very cautious about writing covered calls against stocks that he 
doesn't intend to sell. If one feels that he cannot sell his stock, for whatever reason -
tax considerations, emotional ties, etc. - he really should not sell covered calls against 
it. Perhaps buying a protective put ( discussed in a later chapter) would be a better 
strategy for such a stockholder. 
DIVERSIFYING RETURN AND PROTECTION 
IN A COVERED WRITE 
FUNDAMENTAL DIVERSIFICATION TECHNIQUES 
Quite clearly, the covered writing strategist would like to have as much of a combina­
tion of high potential returns and adequate downside protection as he can obtain. 
Writing an out-of-the-money call will offer higher returns if exercised, but it usually 
affords only a modest amount of downside protection. On the other hand, writing an 
in-the-money call will provide more downside cushion but offers a lower return if 
exercised. For some strategists, this diversification is realized in practice by writing 
out-of-the-money calls on some stocks and in-the-moneys on other stocks. There is no 
guarantee that writing in this manner on a list of diversified stocks will produce supe­
rior results. One is still forced to pick the stocks that he expects will perform better 
(for out-of-the-money writing), and that is difficult to do. Moreover, the individual 
investor may not have enough funds available to diversify into many such situations. 
There is, however, another alternative to obtaining diversification of both returns and 
downside protection in a covered writing situation. 
The writer may often do best by writing half of his position against in-the-rrwn­
eys and half against out-of the-rrwneys on the same stock. This is especially attractive 
for a stock whose out-of-the-money calls do not appear to provide enough downside 
protection, and at the same time, whose in-the-money calls do not provide quite 
enough return. By writing both options, the writer may be able to acquire the return 
and protection diversification that he is seeking. 
Example: The following prices exist for 6-month calls: 
XYZ common stock, 42; 
XYZ April 40 call, 4; and 
XYZ April 45 call, 2.