90 Part II: Call Option Strategies 
The writer should also be aware of whether or not the convertible is catlable 
and, if so, what the exact terms are. Once the convertible has been called by the com­
pany, it will no longer trade in relation to the underlying stock, but will instead trade 
at the call price. Thus, if the stock should climb sharply, the writer could be incur­
ring losses on his written option without any corresponding benefit from his con­
vertible security. Consequently, if the convertible is called, the entire position should 
normally be closed immediately by selling the convertible and buying the option 
back. 
Other aspects of covered writing, such as rolling down or forward, do not 
change even if the option is written against a convertible security. One would take 
action based on the relationship of the option price and the common stock price, as 
usual. 
WRITING AGAINST WARRANTS 
It is also possible to write covered call options against warrants. Again, one must own 
enough warrants to convert into 100 shares of the underlying stock; generally, this 
would be 100 warrants. The transaction must be a cash transaction, the warrants 
must be paid for in full, and they have no loan value. Technically, listed warrants may 
be marginable, but many brokerage houses still require payment in full. There may 
be an additional investment requirement. Warrants also have an exercise price. If the 
exercise price of the warrant is higher than the striking price of the call, the covered 
writer must also deposit the difference between the two as part of his investment. 
The advantage of using warrants is that, if they are deeply in-the-money, they 
may provide the cash covered writer with a higher return, since less of an investment 
is involved. 
Example: XYZ is at 50 and there are XYZ warrants to buy the common at 25. Since 
the warrant is so deeply in-the-money, it will be selling for approximately $25 per 
warrant. XYZ pays no dividend. Thus, if the writer were considering a covered write 
of the XYZ July 50, he might choose to use the warrant instead of the common, since 
his investment, per 100 shares of common, would only be $2,500 instead of the 
$5,000 required to buy 100 XYZ. The potential profit would be the same in either 
case because no dividend is involved. 
Even if the stock does pay a dividend (warrants themselves have no dividend), 
the writer may still be able to earn a higher return by writing against the warrant than 
against the common because of the smaller investment involved. This would depend, 
of course, on the exact size of the dividend and on how deeply the warrant is in-the­
money.