76 Part II: Call Option Strategies 
Technical analysis may be able to provide a little help for the writer faced with 
the dilemma of rolling down to lock in a loss or else holding onto a position that has 
no further downside protection. IfXYZ has broken a support level or important trend 
line, it is added evidence for rolling down. In our example, it is difficult to imagine 
the case in which a $20 stocksuddenly drops to become a $16 stock without sub­
stantial harm to its technical picture. Nevertheless, if the charts should show that 
there is support at 15½ or 16, it may be worth the writer's while to wait and see if 
that support level can hold before rolling down. 
Perhaps the best way to avoid having to lock in losses would be to establish posi­
tions that are less likely to become such a problem. In-the-money covered writes on 
higher-priced stocks that have a moderate amount of volatility will rarely force the 
writer to lock in a loss by rolling down. Of course, any stock, should it fall far enough 
and fast enough, could force the writer to lock in a loss if he has to roll down two or 
thr..ee times in a fairly short time span. However, the higher-priced stock has striking 
prices that are much closer together (in percentages); it thus presents the writer with 
the opportunity to utilize a new option with a lower striking price much sooner in the 
decline of the stock. Also, higher volatility should help in generating large enough 
premiums that substantial portions of the stock's decline can be hedged by rolling 
down. Conversely, low-priced stocks, especially nonvolatile ones, often present the 
most severe problems for the covered writer when they decline in price. 
A related point concerning order entry can be inserted here. When one simul­
taneously buys one call and sells another, he is executing a spread. Spreads in gener­
al are discussed at length later. However, the covered writer should be aware that 
whenever he rolls his position, the order can be placed as a spread order. This will 
normally help the writer to obtain a better price execution. 
AN ALTERNATIVE METHOD OF ROLLING DOWN 
There is another alternative that the covered writer can use to attempt to gain some 
additional downside protection without necessarily having to lock in a loss. Basically, 
the writer rolls down only part of his covered writing position. 
Example: One thousand shares of XYZ were bought at 20 and 10 January 20 calls 
were sold at 2 points each. As before, the stock falls to 16, with the following prices: 
XYZ January 20 call, ½; and XYZ January 15 call, 2½. As was demonstrated in the last 
section, if the writer were to roll all 10 calls down from the January 20 to the January 
15, he would be locking in a loss. Although there may be some justification for this 
action, the writer would naturally rather not have to place himself in such a position. 
One can attempt to achieve some balance between added downside protection 
and upward profit potential by rolling down only part of the calls. In this example,