58 Part II: Call Option Strategies 
very similar when the prices differ by small amounts. This can be seen without the 
use of a table. If one pays a dime more for the stock, his investment increases by $10 
per 100 shares, or $50 total on a 500-share transaction. However, the fact that he has 
received an extra dime for the call means that the investment is reduced by $62.50. 
Thus, there is no effect on the net investment except for commissions. The commis­
sion on 500 shares at 43.10 may be slightly higher than the commission for 500 shares 
at 43. Similarly, the commission on 5 calls at 3.10 may be slightly higher than that on 
5 calls at 3. Even so, the increase in commissions would be so small that it would not 
affect the return by more than one-tenth of 1 %. 
To carry this concept to extremes may prove somewhat misleading. If one were 
to buy stock at 40½ and sell the call at ½, he would still be receiving 40 net, but sev­
eral aspects would have changed considerably. The return if exercised remains amaz­
ingly constant, but the return if unchanged and the percentage downside protection 
are reduced dramatically. If one were to buy stock at 48 and sell the call at 8 - again 
for 40 net - he would improve the return if unchanged and the percentage downside 
protection. In reality, when one places a "net" order with a brokerage firm, he nor­
mally gets an execution with prices quite close to the ones at the time the order was 
first entered. It would be a rare case, indeed, when either upside or downside 
extremes such as those mentioned here would occur in the same trading day. 
SELECTING A COVERED WRITING POSITION 
The preceding sections, in describing types of covered writes and how to compute 
returns and break-even points, have laid the groundwork for the ultimate decision 
that every covered writer must make: choosing which stock to buy and which option 
to write. This is not necessarily an easy task, because there are large numbers of 
stocks, striking prices, and expiration dates to choose from. 
Since the primary objective of covered writing for most investors is increased 
income through stock ownership, the return on investment is an important consider­
ation in determining which write to choose. However, the decision must not be made 
on the basis of return alone. More volatile stocks will offer higher returns, but they 
may also involve more risk because of their ability to fall in price quickly. Thus, the 
amount of downside protection is the other important objective of covered writing. 
Finally, the quality and technical or fundamental outlook of the underlying stock 
itself are of importance as well. The following section will help to quantify how these 
factors should be viewed by the covered writer.