Chapter 2: Covered Call Writing 67 
The writer wishing to establish a covered write against XYZ common stock may like 
the protection afforded by the April 40 call, but may not find the return particularly 
attractive. He may be able to improve his return by writing April 45's against part of 
his position. Assume the writer is considering buying 1,000 shares of XYZ. Table 2-18 
compares the attributes of writing the out-of-the-money (April 45) only, or of writing 
only the in-the-money (April 40), or of writing 5 of each. The table is based on a cash 
covered write, but returns and protection would be similar for a margin write. 
Commissions are included in the figures. 
It is easily seen that the "combined" write - half of the position against the April 
40's and the other half against the April 45's - offers the best balance of return and 
protection. The in-the-money call, by itself, provides over 10% downside protection, 
but the 5% return if exercised is less than 1 % per month. Thus, one might not want 
to write April 40's against his entire position, because the potential return is small. At 
the same time, the April 45's, if written against the entire stock position, would pro­
vide for an attractive return if exercised (over 2% per month) but offer only 5% down­
side protection. The combined write, which has the better features of both options, 
offers over 8% return if exercised (11h% per month) and affords over 8% downside 
protection. By writing both calls, the writer has potentially solved the problems inher­
ent in writing entirely out-of-the-moneys or entirely in-the-moneys. The "combined" 
write frees the covered writer from having to initially take a bearish (in-the-money 
write) or bullish (out-of-the-money write) posture on the stock ifhe does not want to. 
This is often necessary on a low-volatility stock trading between striking prices. 
TABLE 2-18. 
Attributes of various writes. 
Buy 1,000 XYZ and sell 
Return if exercised 
Re~rn if unchanged 
Percent protection 
In-the-Money 
Write 
10 April 40's 
5.1% 
5.1% 
10.5% 
Out-of-the-Money 
Write 
l O April 45's 
12.2% 
6.0% 
5.7% 
Write 
Both Calls 
5 April 40's and 
5 April 45's 
8.4% 
5.4% 
8.1% 
For those who prefer a graphic representation, the profit graph shown in Figure 
2-2 compares the combined write of both calls with either the in-the-money write or 
the out-of-the-money write (dashed lines). It can be observed that all three choices 
are equal if XYZ is near 42 at expiration; all three lines intersect there.