Chapter 25: LEAPS 391 
make from the LEAPS write with returns that can be made from repeatedly writing 
shorter-term calls. Of course, there is no guarantee that he will actually be able to 
repeat the short-term writes during the longer life of the LEAPS. 
As an aside, the strategist who is utilizing the incremental return concept of cov­
ered writing may find LEAPS call writing quite attractive. This is the strategy where­
in he has a higher target price at which he would be willing to sell his common stock, 
and he writes calls along the way to earn an incremental return (see Chapter 2 for 
details). Since this type of writer is only concerned with absolute levels of premiums 
being brought into the account and not with things like return if exercised, he should 
utilize LEAPS calls if available, since the premiums are the largest available. 
Moreover, if the incremental return writer is currently in a short-term call and is 
going to be called away, he might roll into a LEAPS call in order to retain his stock 
and take in more premium. 
The rest of this section discusses covered writing from the more normal view­
point of the investor who buys stock and sells a call against it in order to attain a par­
ticular return. 
Example: XYZ is selling at 50. The investor is considering a 500-share covered write 
and he is unsure whether to use the 6-month call or the 2-year LEAPS. The July 50 
call sells for 4 and has 6 months of life remaining; the January 50 LEAPS call sells for 
8½ and has 2 years of life. Further assume that XYZ pays a dividend of $0.25 per 
quarter. 
As was done in Chapter 2, the net required investment is calculated, then the 
return (if exercised) is computed, and finally the downside break-even point is deter­
mined. 
Stock cost (500 shares @ 50) 
Plus stock commission 
Less option premiums received 
Plus option commissions 
Net cash investment 
Net Investment Required 
July 50 call 
$25,000 
+ 300 
2,000 
+ 50 
$23,350 
January 50 LEAPS 
$25,000 
+ 300 
4,250 
+ 100 
$21,150 
Obviously, the LEAPS covered writer has a smaller cash investment, since he is sell­
ing a more expensive call in his covered write. Note that the option premium is being 
applied against the net investment in either case, as is the normal custom when doing 
covered writing. 
Now, using the net investment required, one can calculate the return (if exer­
cised). That return assumes the stock is above the striking price of the written option