244  •   The Intelligent Option Investor
Clearly, the range of exposure for the $55-strike call is well above the 
BSM cone. The BSM cone is pointing downward because the dividend rate 
is 5 percent—higher than the risk-free rate. This means that BSM drift will 
be lower. In addition, because this is an old, mature, steady-eddy kind of 
company, the expected forward volatility is low. Basically, this is a perfect 
storm for a low option price.
My suggestion is to either write calls on stocks you don’t mind de-
livering to someone else—stocks for which you are very confident in the 
valuation range and are now at or above the upper bound—or simply to 
look for a portfolio of short-put/covered-call investments and treat it like 
a high-yield bond portfolio, as I described in Chapter 10 when explaining 
short puts. It goes without saying that if you think that a stock has a lot of 
unappreciated upside potential, it’s not a good idea to sell that exposure 
away!
One other note about execution: as I have said, short puts and cov-
ered calls are the same thing, but a good many investors do not realize this 
fact or their brokerages prevent them from placing any trade other than a 
covered call. This leads to a situation in which there is a tremendous sup-
ply of calls. Any time there is a lot of supply, the price goes down, and you 
will indeed find covered calls on some companies paying a lot less than 
the equivalent short put. Because you will be accepting the same downside 
exposure, it is better to get paid more for it, so my advice is to write the put 
rather than the covered call in such situations.
To calculate returns for covered calls, I carry out the following steps:
1. Assume that you buy the underlying stock at the market price.
2. Deduct the money you will receive from the call sale as well as 
any projected dividends—these are the two elements of your cash 
inflow—from the market price of the stock. The resulting figure is 
your effective buy price (EBP).
3. Divide your total cash inflow by the EBP .
I always include the projected dividend payment as long as I am writ-
ing a short-tenor covered call and there are no issues with the company 
that would prevent it from paying the dividend. Owners of record have a 
right to receive dividends, even after they have written a covered call on the