O.,,er 2: Covered Call Writing 
TABLE 2-26. 
Two months of incremental return strategy. 
Doy 1 : XYZ = 60 
Sell 3 XYZ October 60's at 7 
One month later: XYZ = 70 
Buy back the 3 XYZ Oct 60's at 11 and 
sell 5 XYZ Oct 70's at 7 
Twa months later: XYZ = 80 
Buy back the 5 Oct 70's at 11 and 
sell 10 XYZ Oct 80's at 6 
COVERED CALL WRITING SUMMARY 
93 
+$2, 100 credit 
-$3 ,300 debit 
+$3,500 credit 
-$5 ,500 debit 
+$6,000 credit 
+$2,800 credit 
This concludes the chapter on covered call writing. The strategy will be referred to 
later, when compared with other strategies. Here is a brief summary of the more 
important points that were discussed. 
Covered call writing is a viable strategy because it reduces the risk of stock own­
ership and will make one's portfolio less volatile to short-term market movements. It 
should be understood, however, that covered call writing may underperform stock 
ownership in general because of the fact that stocks can rise great distances, while a 
covered write has limited upside profit potential. The choice of which call to write 
can make for a more aggressive or more conservative write. Writing in-the-money 
calls is strategically more conservative than writing out-of-the-money calls, because 
of the larger amount of downside protection received. The total return concept of 
covered call writing attempts to achieve the maximum balance between income from 
all sources - option premiums, stock ownership, and dividend income - and down­
side protection. This balance is usually realized by writing calls when the stock is near 
the striking price, either slightly in- or slightly out-of-the-money. 
The writer should compute various returns before entering into the position: 
the return if exercised, the return if the stock is unchanged at expiration, and the 
break-even point. To truly compare various writes, returns should be annualized, and 
all commissions and dividends should be included in the calculations. Returns will be 
increased by taking larger positions in the underlying stock - 500 or 1,000 shares. 
Also, by utilizing a brokerage firm's capability to produce "net" executions, buying the 
stock and selling the call at a specified net price differential, one will receive better 
executions and realize higher returns in the long run.