42 
FIGURE 2-1. 
XYZ covered write. 
C +$500 
0 
e ·a. 
i.ti 
cii en $0 en 0 
...J 
0 
~ a. 
Part II: Call Option Strategies 
Maximum Profit Range 
50 55 60 
"-. Downside Risk 
Stock Price at Expiration 
COVERED WRITING PHILOSOPHY 
The primary objective of covered writing, for most investors, is increased income 
through stock ownership. An ever-increasing number of private and institutional 
investors are writing call options against the stocks that they own. The facts that the 
option premium acts as a partial compensation for a decline in price by the underly­
ing stock, and that the premium represents an increase in income to the stockhold­
er, are evident. The strategy of owning the stock and writing the call will outperform 
outright stock ownership if the stock falls, remains the same, or even rises slightly. In 
fact, the only time that the outright owner of the stock will outperform a covered 
writer is if the stock increases in price by a relatively substantial amount during the 
life of the call. Moreover, if one consistently writes call options against his stock, his 
portfolio will show less variability of results from quarter to quarter. The total posi­
tion - long stock and short option - has less volatility than the stock alone, so on a 
quarter-by-quarter basis, results will be closer to average than they would be with 
normal stock ownership. This is an attractive feature, especially for portfolio man­
agers. 
However, one should not assume that covered writing will outperform stock 
ownership. Stocks sometimes tend to make most of their gains in large spurts. A cov­
ered writer will not participate in moves such as that. The long-term gains that are 
quoted for holding stocks include periods of large gains and sometimes periods of 
large losses as well. The covered writer will not participate in the largest of those 
gains, since his profit potential is limited.