70 Part II: Call Option Strategies 
third of the position against near-term calls, one-third against middle-term calls, and 
the remaining third against long-term calls - one can gain several benefits. First, all 
of one's positions need not be adjusted at the same time. This includes either having 
the stock called away or buying back one written call and selling another. Moreover, 
one is not subject only to the level of option premiums that exist at the time one 
series of calls expires. For example, if one writes only 9-month calls and then rolls 
them over when they expire, he may unnecessarily be subjecting himself to the 
potential of lower returns. If option premium levels happen to be low when it is time 
for this 9-month call writer to sell more calls, he will be establishing a less-than-opti­
mum write for up to 9 months. By spreading his writing out over time, he would, at 
worst, be subjecting only one-third of his holding to the low-premium write. 
Hopefully, premiums would expand before the next eXpiration 3 months later, and he 
would then be getting a relatively better premium on the next third of his portfolio. 
There is an important aside here: The individual or relatively small investor who 
owns only enough stock to write one series of options should generally not write the 
longest-term calls for this very reason. He may not be obtaining a particularly attrac­
tive level of premiums, but may feel he is forced to retain the position until expira­
tion. Thus, he could be in a relatively poor write for as long as 9 months. Finally, this 
type of diversification may also lead to having calls at various striking prices as· the 
market fluctuates cyclically. All of one's stock is not necessarily committed at one 
price if this diversification technique is employed. 
This concludes the discussion of how to establish a covered writing position 
against stock. Covered writes against other types of securities are described later. 
FOLLOW-UP ACTION 
Establishing a covered write, or any option position for that matter, is only part of the 
strategist's job. Once the position has been taken, it must be monitored closely so that 
adjustments may be made should the stock drop too far in price. Moreover, even if 
the stock remains relatively unchanged, adjustments will need to be made as the writ­
ten call approaches expiration. 
Some writers take no follow-up action at all, preferring to let a stock be called 
away if it rises above the striking price at the expiration of the option, or preferring 
to let the original expire worthless if the stock is below the strike. These are not 
always optimum actions; there may be much more decision making involved. 
Follow-up action can be divided into three general categories: