44 Part II: Call Option Strategies. 
In general, out-of-the-money covered writes offer higher potential rewards but 
have less risk protection than do in-the-money covered writes. One can establish an 
aggressive or defensive covered writing position, depending on how far the call 
option is in- or out-of-the-money when the write is established. In-the-money writes 
are more defensive covered writing positions. 
Some examples may help to illustrate how one covered write can be consider­
ably more conservative, from a strategy viewpoint, than another. 
Example: XYZ common stock is selling at 45 and two options are being considered 
for writing: an XYZ July 40 selling for 8, and an XYZ July 50 selling for 1. Table 2-2 
depicts the profitability of utilizing the July 40 or the July 50 for the covered writing. 
The in-the-money covered write of the July 40 affords 8 points, or nearly 18% pro­
tection down to a price of 37 (the break-even point) at expiration. The out-of-the­
money covered write of the July 50 offers only 1 point of downside protection at expi­
ration. Hence, the in-the-rrwney covered write offers greater downside protection 
than does the out-of-the-rrwney covered write. This statement is true in general - not 
merely for this example. 
In the balance of the financial world, it is normally true that investment posi­
tions offering less risk also have lower reward potential. The covered writing exam­
ple just given is no exception. The in-the-money covered write of the July 40 has a 
maximum potential profit of $300 at any point above 40 at the time of expiration. 
However, the out-of-the-money covered write of the July 50 has a maximum poten­
tial profit of $600 at any point above 50 at expiration. The maximum potential profit 
of an out-of-the-rrwney covered write is generally greater than that of an in-the­
rrwney write. 
TABLE 2-2. 
Profit or loss of the July 40 and July 50 calls. 
In-the-Money Write Out-of-the-Money Write 
of July 40 of July SO 
Stock of Total Stock at Total 
Expiration Profit Expiration Profit 
35 -$200 35 -$900 
37 0 40 - 400 
40 + 300 44 0 
45 + 300 45 + 100 
50 + 300 50 + 600 
60 + 300 60 + 600