Mixing Exposure  •  243
ignore the fact that most people simply want to generate a bit of extra in-
come out of the holdings they already have and so are psychologically re-
sistant to both selling ATM (because this makes it more likely for their 
shares to be called away) and selling at a time when the stock price sud-
denly drop (because they want to reap the benefit of the shares recovering).
Although I understand these sentiments, it is important to realize 
that options are financial instruments and not magical ones. It would be 
nice if we could simply find an investment tool that we could bolt onto 
our present stock holdings that would increase the dividend a nice amount 
but that wouldn’t put us at risk of having to deliver our beloved stocks to a 
complete stranger; unfortunately, this is not the case for options.
For example, let’s say that you own stock in a company that is paying out 
a very nice dividend yield of 5 percent at present prices. This is a mature firm 
that has tons of cash flow but few opportunities for growth, so management 
has made the welcome choice to return cash to shareholders. The stock is trad-
ing at $50 per share, but because the dividend is attractive to you, you are loathe 
to part with the stock. As such, you would prefer to write the covered call at a 
$55 or even a $60 strike price. A quick look at the BSM cone tells us why you 
should not be expecting a big boost in yield from selling the covered calls:
80
Sold call
range of
exposure
70
60
50
40
30
20
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Cash Flows R Us, Inc. (CASH)
Date/Day Count
Stock Price
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LIGHT GREENGRAY
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