392 Part Ill: Put Option Strategies 
at its expiration, and the stock is called away. The short-term writer would have col­
lected two dividends of the common stock, while the LEAPS writer would have col­
lected eight by expiration. 
Stock sale (500 @ 50) 
Less stock commission 
Plus dividends earned 
until expiration 
Less net investment 
Net profit if exercised 
Return if exercised 
(net profit/net investment) 
Return If Exercised 
+ 
July 50 call 
$25,000 
300 
250 
- 23,350 
$ 1,600 
6.9% 
January 50 LEAPS 
$25,000 
300 
+ 1,000 
- 21,150 
$ 4,550 
21.5% 
The LEAPS writer has a much higher net return if exercised, again because he 
wrote a more expensive option to begin with. However, in order to fairly compare the 
two writes, one must annualize the returns. That is, the July 50 covered write made 
6.9% in six months, so it could make twice that in one year, if it can be duplicated six 
months from now. In a similar manner, the LEAPS covered writer can make 21.5% 
in two years if the stock is called away. However, on an annualized basis, he would 
make only half that amount. 
Return If Exercised, Annualized 
July 50 call January 50 LEAPS 
13.8% 10.8% 
Thus, on an annualized basis, the short-term write seems better. The shorter-term 
call will generally have a higher rate of return, annualized, than the LEAPS call. The 
problems with annualizing are discussed in the following text. 
Finally, the downside break-even point can be computed for each write. 
Downside Break-Even Calculation 
Net investment 
Less dividends received 
Total stock cost to expiration 
Divided by shares held (500), 
equals break-even price: 
July 50 call 
$23,350 
250 
$23,100 
46.2 
January 50 LEAPS 
$21,150 
1 000 
$20,150 
40.3