Chapter 2: Covered Call Writing 
Return if exercised - margin 
Downside break-even point cash 
Downside break-even point - margin 
XYZ 
7.9% 
46.3 
47.6 
63 
AAA 
16.2% 
44.9 
46.1 
Seeing these calculations, the XYZ stockholder may feel that it is not advisable to 
write against his stock, or he may even be tempted to sell XYZ and buy AAA in order 
to establish a covered write. Either of these actions could be a mistake. 
First, he should compute what his returns would be, at current prices, from 
writing against the XYZ he already owns. Since the stock is already held, no stock buy 
commissions would be involved. This would reduce the net investment shown below 
by the stock purchase commissions, or $345, giving a total net investment (cash) of 
$23,077. In theory, the stockholder does not really make an investment per se; after 
all, he already owns the stock. However, for the purposes of computing returns, an 
investment figure is necessary. This reduction in the net investment will increase his 
profit by the same amount - $345 - thus, bringing the profit up to $1,828. 
Consequently, the return if exercised (cash) wpuld be 7.9% on XYZ stock already 
held. On margin, the return would increase to 11.3% after eliminating purchase com­
missions. This return, assumed to be for a 6-month period, is well in excess of 1 % per 
TABLE 2-17. 
Summary of covered writing returns, XYZ and AAA. 
XYZ AAA 
Buy 500 shares at 50 $25,000 $25,000 
Plus stock commissions + 345 + 345 
Less option premiums received - 2,000 - 3,000 
Plus option sale commissions + 77 + 91 
Net investment-cash $23,422 $22,436 
Sell 500 shares at 50 $25,000 $25,000 
Less stock sale commissions 345 345 
Dividend received + 250 0 
Less net investment - 23,422 - 22,436 
Net profit $ 1,483 $ 2,219 
Return if exercised-cash 6.3% 9.9%