72 Part II: Call Option Strategies 
• 
The covered writer of the January 50 would, at this time, have a small unrealized loss 
of one point in his overall position: His loss on the common stock is 6 points, but he 
has a 5-point gain in the January 50 call. (This demonstrates that prior to expiration, 
a loss occurs at the "break-even" point.) If the stock should continue to fall from 
these levels, he could have a larger loss at expiration. The call, selling for one point, 
only affords one more point of downside protection. If a further stock price drop is 
anticipated, additional downside protection can be obtained by rolling down. In this 
example, if one were to buy back the January 50 call at 1 and sell the January 45 at 
4, he would be rolling down. This would increase his protection by another three 
points - the credit generated by buying the 50 call at 1 and selling the 45 call at 4. 
Hence, his downside break-even point would be 42 after rolling down. 
Moreover, if the stock were to remain unchanged - that is, if XYZ were exactly 
45 at January expiration - the writer would make an additional $300. If he had not 
rolled down, the most additional income that he could make, if XYZ remained 
unchanged, would be the remaining $100 from the January 50 call. So rolling down 
gives more downside protection against a further drop in stock price and may also 
produce additional income if the stock price stabilizes. 
In order to more exactly evaluate the overall effect that was obtained by rolling 
down in this example, one can either compute a profit table (Table 2-21) or draw a 
net profit graph (Figure 2-3) that compares the original covered write with the 
rolled-down position. 
Note that the rolled-down position has a smaller maximum profit potential than 
the original position did. This is because, by rolling down to a January 45 call, the 
writer limits his profits anywhere above 45 at expiration. He has committed himself 
to sell stock 5 points lower than the original position, which utilized a January 50 call 
and thus had limited profits above 50. Rolling down generally reduces the maximum 
TABLE 2·21. 
Profit table. 
XYZ Price at Profit from Profit from 
Expiration January 50 Write Rolled Position 
40 -$500 -200 
42 - 300 0 
45 0 +300 
48 + 300 +300 
50 + 500 +300 
60 + 500 +300