Cbapter 2: Covered Ca# Writing 
Example: The following prices exist at January expiration: 
XYZ, 50; 
XYZ January 45 call, 5; and 
XYZ July 50 call, 7. 
85 
In this case, if one had originally written the January 45 call, he could now roll up to 
the July 50 at expiration for a credit of 2 points. This action is quite prudent, since 
the break-even point and the maximum profit potential are enhanced. The break­
even point is lowered by the 2 points of credit received from rolling up. The maxi­
mum profit potential is increased substantially - by 7 points - since the striking price 
is raised by 5 points and an additional 2 points of credit are taken in from the roll up. 
Consequently, whenever one can roll up for a credit, a situation that would normally 
arise only on more volatile stocks, he should do so. 
Another choice that may occur at or near expiration is that of rolling down. The 
case may arise whereby one has allowed a written call to expire worthless with the 
stock more than a small distance below the striking price. The writer is then faced 
with the decision of either writing a small-premium out-of-the-money call or a larg­
er-premium in-the-money call. Again, an example may prove to be useful. 
Example: Just after the January 25 call has expired worthless, 
XYZ is at 22, 
XYZ July 25 call at ¾, and 
XYZ July 20 call at 3½. 
If the investor were now to write the July 25 call, he would be receiving only¾ of a 
point of downside protection. However, his maximum profit potential would be quite 
large if XYZ could rally to 25 by expiration. On the other hand, the July 20 at 3½ is 
an attractive write that affords substantial downside protection, and its 1 ½ points of 
time value premium are twice that offered by the July 25 call. In a purely analytic 
sense, one should not base his decision on what his performance has been to date, 
but that is a difficult axiom to apply in practice. If this investor owns XYZ at a high­
er price, he will almost surely opt for the July 25 call. If, however, he owns XYZ at 
approximately the same price, he will have no qualms about writing the July 20 call. 
There is no absolute rule that can be applied to all such situations, but one is usual­
ly better off writing the call that provides the best balance between return and down­
side protection at all times. Only if one is bullish on the underlying stock should he 
write the July 25 call.