' 64 Part II: Call Option Strategies 
month, the level nominally used for acceptable covered writes. Thus, the investor 
who already owns stock may inadvertently be overlooking a potentially attractive cov­
ered write because he has not computed the returns excluding the stock purchase 
commission on his current stock holding. 
It could conceivably be an even more extreme oversight for the investor to 
switch from XYZ to AAA for writing purposes. The investor may consider making this 
switch because he thinks that he could substantially increase his return, from 6.3% to 
9.9% for the 6-month period, as shown in Table 2-17 comparing the two writes. 
However, the returns are not truly comparable because the investor already 
owns XYZ. To make the switch, he would first have to spend $345 in stock commis­
sions to sell his XYZ, thereby reducing his profits on AAA by $345. Referring again to 
the preceding detailed breakdown of the return if exercised, the profit on AAA would 
then decline to $1,874 on the investment of $22,436, a return if exercised (cash) of 
8.4%. On margin, the comparable return from switching stocks would drop to 14.8%. 
The real comparison in returns from writing against these two stocks should be 
made in the following manner. The return from writing against XYZ that is already 
held should be compared with the return from writing against AAA after switching 
fromXYZ: 
Return if exercised - cash 
Return if exercised - margin 
XYZ Already Held 
7.9% 
11.3% 
Switch from XYZ to AAA 
8.4% 
14.8% 
Each investor must decide for himself whether it is worth this much smaller 
increase in return to switch to a more volatile stock that pays a smaller dividend. He 
can, of course, only make this decision by making the true comparison shown imme­
diately above as opposed to the first comparison, which assumed that both stocks had 
to be purchased in order to establish the covered write. 
The same logic applies in situations in which an investor has been doing cov­
ered writing. If he owns stock on which an option has expired, he will have to decide 
whether to write against the same stock again or to sell the stock and buy a new stock 
for covered writing purposes. Generally, the investor should write against the stock 
already held. This justifies the method of computation of return if unchanged for out­
of-the-money writes and also the computation of downside break-even points in 
which a stock sale commission was not charged. That is, the writer would not nor­
mally sell his stock after an option has expired worthless, but would instead write 
another option against the same stock. It is thus acceptable to make these computa­
tions without including a stock sales commission.