Chapter 2: Covered Call Writing 61 
rrwderately out-of the-rrwney covered writes will peiform better than in-the-rrwney 
writes. In falling or static markets, any covered writer, even the more aggressive one, 
will outperform the stockowner who does not write calls. The out-of-the-money cov­
ered writer has more risk in such a market than the in-the-money writer does. But in 
a rising market, the out-of-the-money covered writer will not limit his returns as much 
as the in-the-money writer will. As stated earlier, the out-of-the-money writer's per­
formance will more closely follow the performance of the underlying stock; that is, it 
will be more volatile on a quarter-by-quarter basis. 
There is merit in either philosophy. The in-the-money writes appeal to those 
investors looking to earn a relatively consistent, moderate rate of return. This is the 
total return concept. These investors are generally concerned with preservation of 
capital, thus striving for the greater levels of downside protection available from in­
the-money writes. On the other hand, some investors prefer to strive for higher 
potential returns through writing out-of-the-money calls. These more aggressive 
investors are willing to accept more downside risk in their covered writing positions 
in exchange for the possibility of higher returns should the underlying stock rise in 
price. These investors often rely on a bullish research opinion on a stock in order to 
select out-of-the-money writes. 
Although the type of covered writing strategy pursued is a matter of personal 
philosophy, it would seem that the benefits of in-the-money strategy- more consis­
tent returns and lessened risk than stock ownership will normally provide - would 
lead the portfolio manager or less aggressive investor toward this strategy. If the 
investor is interested in achieving higher returns, some of the strategies to be pre­
sented later in the book may be able to provide higher returns with less risk than can 
out-of-the-money covered writing. 
The final important consideration in selecting a covered write is the underlying 
stock itself. One does not necessarily have to be bullish on the underlying stock to 
take a covered writing position. As long as one does not foresee a potential decline in 
the underlying stock, he can feel free to establish the covered writing position. It is 
generally best if one is neutral or slightly bullish on the underlying stock. If one is 
bearish, he should not take a covered writing position on that stock, regardless of the 
levels of protection that can be obtained. An even broader statement is that one 
should not establish a covered write on a stock that he does not want to own. Some 
individual investors may have qualms about buying stock they feel is too volatile for 
them. Impartially, if the return and protection are adequate, the characteristics of the 
total position are different from those of the underlying stock. However, it is still true 
that one should not invest in positions that he considers too risky for his portfolio, nor 
should one establish a covered write just because he likes a particular stock. If the