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Example: The following prices exist: 
XYZ common, 49; 
XYZ April 50 call, 3; and 
XYZ April 35 call, 14. 
Part II: Call Option Strategies 
Since the deeply in-the-money call has no time premium, its purchase will perform 
much like the purchase of the stock until April expiration. Table 7-4 summarizes the 
profit potential from the covered write or the bull spread. The profit potentials are 
the same from a cash covered write or the bull spread. Both would yield a $400 prof­
it before commissions if XYZ were above 50 at April expiration. However, since the 
bull spread requires a much smaller investment, the spreader could put $3,500 into 
interest-bearing securities. This interest could be considered the equivalent of 
receiving the dividends on the stock. In any case, the spreader can lose only $1,100, 
even if the stock declines substantially. The covered writer could have a larger unre­
alized loss than that if XYZ were below 35 at expiration. Also, in the bull spread sit­
uation, the writer can "roll down" the April 50 call if the stock declines in price, just 
as he might do in a covered writing situation. 
TABLE 7-4. 
Results for covered write and bull spread compared. 
Maximum profit potential 
(stock over 50 in April) 
Break-even point 
Investment 
Covered Write: 
Buy XYZ and Sell 
April 50 Coll 
$ 400 
46 
$4,600 
Bull Spread: 
Buy XYZ April 35 Call and 
Sell April 50 Coll 
$ 400 
46 
$1,100 
Thus, the bull spread offers the same dollar rewards, the same break-even 
point, smaller commission costs, less potential risk, and interest income from the 
fixed-income portion of the investment. While it is not always possible to find a 
deeply in-the-money call to use as a "substitute" for buying the stock, when one does 
exist, the strategist should consider using the bull spread instead of the covered write.