242  •   The Intelligent Option Investor
We accepted
downside
exposure when
we sold this
put, so have no
exposure to the
upside here.
RED
The top of the “Covered call” diagram is grayed out because we have 
sold away the upside exposure to the stock by selling the call option, and 
we are left only with the acceptance of the stock’s downside exposure. The 
pictures are slightly different, but the economic impact is the same.
The other difference you will notice is that after the option expires, in the 
case of the covered call, we have represented the graphic as though there is some 
residual exposure. This is represented in this way because if the option expires 
ITM, you will have to deliver your stock to the counterparty who bought your 
call options. As such, your future exposure to the stock is contingent on another 
investor’s actions and the price movement of the stock. This is an important point 
to keep in mind, and I will discuss it more in the “Common Pitfalls” section.
Execution
Because this strategy is identical from a risk-reward perspective to short 
puts, the execution details should be the same as well. Indeed, covered 
calls should—like short puts—be executed ATM to get the most time value 
possible and preferably should be done on a stock that has had a recent fall 
and whose implied volatility has spiked. However, these theoretical points 
Short put