Clrapter 2: Covered Call Writing 51 
Example 2: Recall that the net investment for the cash write was $20,380. A 
margin covered write requires less than half of the investment of a cash write when 
the margin rate (set by the Federal Reserve) is 50%. In a margin account, if one 
desires to remove the premium from the account, he may do so immediately provid­
ed that he has enough reserve equity in the account to cover the purchase of the 
stock. If he does so, his net investment would be equal to the debit balance calcula­
tion shown on the right in Table 2-8. 
TABLE 2-8. 
Net investment required-margin account. 
Stock cost $21,500 
Plus stock commissions + 320 Debit balance calculation: 
Net stock cost $21,820 Net stock cost $21,820 
Times margin rate X 50% Less equity - 10,910 
Equity required $10,910 Debit balance $10,910 
Less premiums received 1,500 (at 50% margin) 
Plus option commissions + 60 
Net margin investment $ 9,470 
Tables 2-9 to 2-12 illustrate the computation of returns from writing on margin. 
If one has already computed the cash returns, he can use method 2 most easily. 
Method 1 involves no prior profit calculations. 
TABLE 2-9. 
Return if exercised-margin account. 
Method 1 Method 2 
Stock sale proceeds 
Less stock commission 
Plus dividends 
$22,500 Net profit if exercised-cash $2,290 
+ 
Less margin interest charges 
330 
500 
(10% on $10,910 for 6 months) - 545 
Less debit balance 
Less net margin investment 
Net profit-margin 
- 10,910 
- 9 470 
$ 1,745 
Less margin interest charges -
Net profit if exercised­
margin 
$1,745 Return if exercised = $9 ,470 = 18.4% 
545 
$1,745