Mixing Exposure  •  245
stock, so it makes sense to count the dividend inflow as one element that 
reduces your EBP . In formula form, this turns out to be
−−Coveredc allr eturn= premiumr eceivedf romc all+ projectedd ividends
stockp rice premiumf romc allp rojected dividends
For a short put, you have no right to receive the dividend, so I find the  
return using the following formula:
−Shortp ut return= premiumr eceivedf roms hort put
strikepricep remium from shortp ut
Common Pitfalls
Taking Profit
One mistake I hear people make all the time is saying that they are going 
to “take profit” using a covered call. Writing a covered call is taking profit 
in the sense that you no longer enjoy capital gains from the stock’s appre-
ciation, but it is certainly not taking profit in the sense of being immune 
to falls in the market price of the stock. The call premium you receive will 
cushion a stock price drop, but it will certainly not shield you from it. If 
you want to take profits on a successful stock trade, hit the “Sell” button.
Locking in a Loss
A person sent me an e-mail telling me that she had bought a stock at $17, 
sold covered calls on it when it got to $20 (in order to “take profits”), and 
now that the stock was trading for $11, she wanted to know how she could 
“repair” her position using options. Unfortunately, options are not magical 
tools and cannot make up for a prior decision to buy a stock at $17 and ride 
it down to $11.
If you are in such a position, don’t panic. It will be tempting to write 
a new call at the lower ATM price ($11 in this example) because the cash 
inflow from that covered call will be the most. Don’t do it. By writing a 
covered call at the lower price, you are—if the shares are called away—
locking in a realized loss on the position. Y ou can see this clearly if you list 
each transaction in the example separately.