Chapter 2: Covered Call Writing 
TABLE 2-20. 
Net return-cash account. 
Return If Exercised 
Sell 500 XYZ at 45 $22,500 
Sell 500 XYZ at 40 20,000 
Less total stock sale 
commissions 560 
Plus dividends ($1 /share) + 1,000 
Less net investment - 39,600 
Net profit if exercised $ 3,340 
Return if exercised = 3,340 = 8_4% 
(cash) 39,600 
69 
Return If Unchanged 
Unchanged stock value (500 
shares at 42) $21,000 
Sell 500 at 40 + 20,000 
Commissions on sale at 40 280 
Plus dividends ($1 /share) . + 1,000 
Less net investment - 39,600 
Net profit if unchanged $ 2, 120 
Return if unchanged = 2, 120 = 5 _4% 
(cash) 39,600 
because half of the stock will be called away if it remains unchanged (the in-the­
money portion) whereas the other half will not. This is consistent with the method of 
calculating the return if unchanged that was introduced previously. 
The break-even point is calculated as before. The "total stock cost to expiration" 
would be the net investment of $39,600 less the $1,000 received in dividends. This is 
a total of $38,600. On a per-share basis, then, the break-even point of 38.6 is 8.1 % 
below the current stock price of 42. Thus, the amount of percentage downside pro­
tection is 8.1 %. 
The foregoing calculations clearly demonstrate that the returns on the "com­
bined" write are not exactly the averages of the in-the-money and out-of-the-money 
returns, because of the different commission calculations at various stock prices. 
However, if one is working with a computer-generated list and does not want to both­
er to calculate exactly the return on the combined write, he can arrive at a relatively 
close approximation by averaging the returns for the in-the-money write and the out­
of-the-money write. 
OTHER DIVERSIFICATION TECHNIQUES 
Holders of large positions in a particular stock may want even more diversification 
than can be provided by writing against two different striking prices. Institutions, 
pension funds, and large individual stockholders may fall into this category. It is often 
advisable for such large stockholders to diversify their writing over time as well as 
over at least two striking prices. By diversifying over time - for example, writing one-