88 Part II: Call Option Strategies 
return concept - is described that has great appeal to large stockholders, both indi­
viduals and institutions. 
COVERED WRITING AGAINST A CONVERTIBLE SECURITY 
It may be more advantageous to buy a security that is convertible into common stock 
than to buy the stock itself, for covered call writing purposes. Convertible bonds and 
convertible preferred stocks are securities commonly used for this purpose. One 
advantage of using the convertible security is that it often has a higher yield than does 
the common stock itself. 
Before describing the covered write, it may be beneficial to review the basics of 
convertible securities. Suppose XYZ common stock has an XYZ convertible Preferred 
A stock that is convertible into 1.5 shares of common. The number of shares of com­
mon that the convertible security converts into is an important piece of information 
that the writer must know. It can be found in a Standard & Poor's Stock Guide (or 
Bond Guide, in the case of convertible bonds). 
The writer also needs to determine how many shares of the convertible securi­
ty must be owned in order to equal 100 shares of the common stock. This is quickly 
determined by dividing 100 by the conversion ratio - 1.5 in our XYZ example. Since 
100 divided by 1.5 equals 66.666, one must own 67 shares of XYZ cv Pfd A to cover 
the sale of one XYZ option for 100 shares of common. Note that neither the market 
prices of XYZ common nor the convertible security are necessary for this computa­
tion. 
When using a convertible bond, the conversion information is usually stated in 
a form such as, "converts into 50 shares at a price of 20." The price is irrelevant. What 
is important is the number of shares that the bond converts into - 50 in this case. 
Thus, if one were using these bonds for covered writing of one call, he would need 
two (2,000) bonds to own the equivalent of 100 shares of stock. 
Once one knows how much of the convertible security must be purchased, he 
can use the actual prices of the securities, and their yields, to determine whether a 
covered write against the common or the convertible is more attractive. 
Example: The following information is known: 
XYZ common, 50; 
XYZ CV Pfd A, 80; 
XYZ July 50 call, 5; 
XYZ dividend, 1.00 per share annually; and 
XYZ cv Pfd A dividend, 5.00 per share annually.