60 Part II: Call Option Strategies 
is somewhat misleading, however, since the more volatile stocks will always offer a 
large percentage of downside protection (their premiums are higher). The difficulty 
arises in trying to decide if 10% protection on a volatile stock is better than or worse 
than, say, 6% protection on a less volatile stock. There are mathematical ways to 
quantify this, but because of the relatively advanced nature of the computations 
involved, they are not discussed until later in the text, in Chapter 28 on mathemati­
cal applications. 
Rather than go into involved mathematical calculations, many covered writers 
use the percentage of downside protection and will only consider writes that offer a 
certain minimum level of protection, say 10%. Although this is not exact, it does 
strive to ensure that one has minimal downside protection in a covered write, as well 
as an acceptable return. A standard figure that is often used is the 10% level of pro­
tection. Alternatively, one may also require that the write be a certain percent in-the­
money, say 5%. This is just another way of arriving at the same concept. 
THE IMPORTANCE OF STRATEGY 
In a conservative option writing strategy, one should be looking for minimum returns 
if unchanged of 1 % per month, with downside protection of at least 10%, as general 
guidelines. Employing such criteria automatically forces one to write in-the-money 
options in line with the total return concept. The overall position constructed by 
using such guidelines as these will be a relatively conservative position - regardless 
of the volatility of the underlying stock - since the levels of protection will be large 
but a reasonable return can still be attained. There is a danger, however, in using 
fixed guidelines, because market conditions change. In the early days of listed 
options, premiums were so large that virtually every at- or in-the-money covered 
write satisfied the foregoing criteria. However, now one should work with a ranked 
list of covered writing positions, or perhaps two lists. A daily computer ranking of 
either or both of the following categories would help establish the most attractive 
types of conservative covered writes. One list would rank, by annualized return, the 
writes that afford, as a minimum, the desired downside protection level, say 10%. 
The other list would rank, by percentage downside protection, all the writes that 
meet at least the minimum acceptable return if unchanged, say 12%. If premium lev­
els shrink and the lists become quite small on a daily basis, one might consider 
expanding the criteria to view more potential situations. On the other hand, if pre­
miums expand dramatically, one might consider using more restrictive criteria, to 
reduce the number of potential writing candidates. 
A different group of covered writers may favor a more aggressive strategy of out­
of-the-money writes. There is some mathematical basis to believe, in the long rnn, that