54 Part II: Call Option Strategies 
than computing the interest charge as the debit times the interest rate multiplied by 
the time to expiration, one should technically use: 
Margin interest charges = Debit [(l + r/ -1] 
where r is the interest rate per month and t the number of months to expiration. (It 
would be incorrect to use days to expiration, since brokerage firms compute interest 
monthly, not daily.) 
In Example 2 of the preceding section, the debit was $10,910, the time was 6 
months, and the annual interest rate was 10%. Using this more complex formula, the 
margin interest charges would be $557, as opposed to the $545 charge computed 
with the simpler formula. Thus, the difference is usually small, in terms of percent­
age, and it is therefore comrrwn practice to use the simpler method. 
SIZE OF THE POSITION 
So far it has been assumed that the writer was purchasing 500 shares of XYZ and sell­
ing 5 calls. This requires a relatively considerable investment for one position for the 
individual investor. However, one should be aware that buying too few shares for cov­
ered writing purposes can lower returns considerably. 
Example: If an investor were to buy 100 shares of XYZ at 43 and sell l July 45 call 
for 3, his return if exercised would drop from the 11.2% return (cash) that was com­
puted earlier to a return of9.9% in a cash account. Table 2-13 verifies this statement. 
Since commissions are less, on a per-share basis, when one buys more stock and 
sells more calls, the returns will naturally be higher with a 500- or 1,000-share posi­
tion than with a 100- or 200-share position. This difference can be rather dramatic, as 
Tables 2-14 and 2-15 point out. Several interesting and worthwhile conclusions can be 
drawn from these tables. The first and most obvious conclusion is that the rrwre shares 
TABLE 2-13. 
Cash investment vs. return. 
Net Investment-Cash ( l 00 shares) 
Stock cost $4,300 
Plus commissions + 85 
Less option premium 300 
Plus option commissions + 25 
Net investment $4,110 
Return If Exercised-Cash ( l 00 shares) 
Stock sale price 
Stock commissions 
Plus dividend 
Less net investment 
Net profit if exercised 
$4,500 
85 
+ 100 
- 4 110 
$ 405 
Return if exercised = $4 05 = 9. 9% 
$4,110