Cbapter 2: Covered Call Writing 91 
Covered writing against warrants is not a frequent practice because of the small 
number of warrants on optionable stocks and the problems inherent in checking 
available returns. However, in certain circumstances, the writer may actually gain a 
decided advantage by writing against a deep in-the-money warrant. It is often not 
advisable to write against a warrant that is at- or out-of-the-money, since it can 
decline by a large percentage if the underlying stock drops in price, producing a high­
risk position. Also, the writer's investment may increase in this case if he rolls down 
to an option with a striking price lower than the warrant's exercise price. 
WRITING AGAINST LEAPS 
A form of covered call writing can be constructed by buying LEAPS call options and 
selling shorter-term out-of-the-money calls against them. This strategy is much like 
writing calls against warrants. This strategy is discussed in more detail in Chapter 25 
on LEAPS, under the subject of diagonal spreads. 
PERCS 
The PERCS (Preferred Equity Redemption Cumulative Stock) is a form of covered 
writing. It is discussed in Chapter 32. 
THE INCREMENTAL RETURN CONCEPT OF COVERED WRITING 
The incremental return concept of covered call writing is a way in which the covered 
writer can earn the full value of stock appreciation between todays stock price and a 
target sale price, which may be substantially higher. At the same time, the writer can 
earn an incremental, positive return from writing options. 
Many institutional investors are somewhat apprehensive about covered call 
writing because of the upside limit that is placed on profit potential. If a call is writ­
ten against a stock that subsequently declines in price, most institutional managers 
would not view this as an unfavorable situation, since they would be outperforming 
all managers who owned the stock and who did not write a call. However, if the stock 
rises substantially after the call is written, many institutional managers do not like 
having their profits limited by the written call. This strategy is not only for institu­
tional money managers, although one should have a relatively substantial holding in 
an underlying stock to attempt the strategy - at least 500 shares and preferably 1,000 
shares or more. The incremental return concept can be used by anyone who is plan­
ning to hold his stock, even if it should temporarily decline in price, until it reaches a 
predetermined, higher price at which he is willing to sell the stock.