74 Part II: Call Option Strategies 
with enough premium to realize any profit if the stock were then called away at expi­
ration. These situations arise more commonly on lower-priced stocks, where the 
striking prices are relatively far apart in percentage terms. Out-of-the-money writes 
are more susceptible to this problem than are in-the-money writes. Although it is not 
emotionally satisfying to be in an investment position that cannot produce a profit -
at least for a limited period of time - it may still be beneficial to roll down to protect 
as much of the stock price decline as possible. 
Example: For the covered write described as "buy XYZ at 20, sell the January 20 call 
at 2," the stock unexpectedly drops very quickly to 16, and the following prices exist: 
XYZ common, 16; 
XYZ January 20 call,½; and 
XYZ January 15 call, 2½. 
The covered writer is faced with a difficult choice. He currently has an unrealized 
loss of 2½ points - a 4-point losson the stock which is partially offset by a 1 ½-point 
gain on the January 20 call. This represents a fairly substantial percentage loss on his 
investment in a short period of time. He could do nothing, hoping for the stock to 
recover its loss. Unfortunately, this may prove to be wishful thinking. 
If he considers rolling down, he will not be excited by what he sees. Suppose 
that the writer wants to roll down from the January 20 to the January 15. He would 
thus buy the January 20 at ½ and sell the January 15 at 2½, for a net credit of 2 
points. By rolling down, he is obligating himself to sell his stock at 15, the striking 
price of the January 15 call. Suppose XYZ were above 15 in January and were called 
away. How would the writer do? He would lose 5 points on his stock, since he origi­
nally bought it at 20 and is selling it at 15. This 5-point loss is substantially offset by 
his option profits, which amount to 4 points: 1 ½ points of profit on the January 20, 
sold at 2 and bought back at ½, plus the 2½ points received from the sale of the 
January 15. However, his net result is a 1-point loss, since he lost 5 points on the stock 
and made only 4 points on the options. Moreover, this 1-point loss is the best that he 
can hope for! This is true because, as has been demonstrated several times, a covered 
writing position makes its maximum profit anywhere above the striking price. Thus, 
by rolling down to the 15 strike, he has limited the position severely, to the extent of 
"locking in a loss." 
Even considering what has been shown about this loss, it is still correct for this 
writer to roll down to the January 15. Once the stock has fallen to 16, there is noth­
ing anybody can do about the unrealized losses. However, if the writer rolls down, he 
can prevent the losses from accumulating at a faster rate. In fact, he will do better by