Chapter 2: Covered Call Writing 
A WORD OF CAUTION 
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The stockholder who owns stock from a previous purchase and later contemplates 
writing calls against that stock must be aware of his situation. He must realize and 
accept the fact that he might lose his stock via assignment. If he is determined to 
retain ownership of the stock, he may have to buy back the written option at a loss 
should the underlying stock increase in price. In essence, he is limiting the stock's 
upside potential. If a stockholder is going to be frustrated and disappointed when he 
is not fully participating during a rally in his stock, he should not write a call in the 
first place. Perhaps he could utilize the incremental return concept of covered writ­
ing, a topic covered later in this chapter. 
As stressed earlier, a covered writing strategy involves viewing the stock and 
option as a total position. It is not a strategy wherein the investor is a stockholder who 
also trades options against his stock position. If the stockholder is selling the calls 
because he thinks the stock is going to decline in price and the call trade itself will be 
profitable, he may be putting himself in a tenuous position. Thinking this way, he will 
probably be satisfied only if he makes a profit on the call trade, regardless of the 
unrealized result in the underlying stock. This sort of philosophy is contrary to a cov­
ered writing strategy philosophy. Such an investor - he is really becoming a trader 
should carefully review his motives for writing the call and anticipate his reaction if 
the stock rises substantially in price after the call has been written. 
In essence, writing calls against stock that you have no intention of selling is 
tantamount to writing naked calls! If one is going to be extremely frustrated, perhaps 
even experiencing sleepless nights, if his stock rises above the strike price of the call 
that he has written, then he is experiencing trials and tribulations much as the writer 
of a naked call would if the same stock move occurred. This is an unacceptable level 
of emotional worry for a true covered writing strategist. 
Think about it. If you have some very low-cost-basis stock that you don't really 
want to sell, and then you sell covered calls against that stock, what do you wish will 
happen? Most certainly you wish that the options will expire worthless (i.e., that the 
stock won't get called away) - exactly what a naked writer wishes for. 
The problems can be compounded if the stock rises, and one then decides to 
roll these calls. Rather than spend a small debit to close out a losing position, an 
investor may attempt to roll to more distant expiration months and higher strike 
prices in order to keep bringing in credits. Eventually, he runs out of room as the 
lower strikes disappear, and he has to either sell some stock or pay a big debit to buy 
back the written calls. So, if the underlying stock continues to run higher, the writer 
suffers emotional devastation as he attempts to "fight the market." There have been 
some classic cases of Murphy's law whereby people have covered the calls at a big