94 Part II: Call Option Strategies 
The selection of which call to write should be made on a comparison of avail­
able returns and downside protection. One can sometimes write part of his position 
out-of-the-money and the other part in-the-money to force a balance between return 
and protection that might not otherwise exist. Finally, one should not write against an 
underlying stock if he is bearish on the stock. The writer should be slightly bullish, or 
at least neutral, on the underlying stock. 
Follow-up action can be as important as the selection of the initial position 
itself. By rolling down if the underlying stock drops, the investor can add downside 
protection and current income. If one is unwilling to limit his upside potential too 
severely, he may consider rolling down only part of his call writing position. As the 
written call expires, the writer should roll forward into a more distant expiration 
month if the stock is relatively close to the original striking price. Higher consistent 
returns are achieved in this manner, because one is not spending additional stock 
commissions by letting the stock be called away. An aggressive follow-up action can 
also be taken when the underlying stock rises in price: The writer can roll up to a 
higher striking price. This action increases the maximum profit potential but also 
exposes the position to loss if the stock should subsequently decline. One would want 
to take no follow-up action and let his stock be called if it is above the striking price 
and if there are better returns available elsewhere in other securities. 
Covered call writing can also be done against convertible securities - bonds or 
preferred stocks. These convertibles sometimes offer higher dividend yields and 
therefore increase the overall return from covered writing. Also, the use of warrants 
or LEAPS in place of the underlying stock may be advantageous in certain circum­
stances, because the net investment is lowered while the profit potential remains the 
same. Therefore, the overall return could be higher. 
Finally, the larger individual stockholder or institutional investor who wants to 
achieve a certain price for his stock holdings should operate his covered writing strat­
egy under the incremental return concept. This will allow him to realize the full prof­
it potential of his underlying stock, up to the target sale price, and to earn additional 
positive income from option writing.