CHAPl'ER 2 
Covered Call Writing 
Covered call writing is the name given to the strategy by which one sells a call option 
while simultaneously owning the obligated number of shares of underlying stock. 
The writer should be mildly bullish, or at least neutral, toward the underlying stock. 
By writing a call option against stock, one always decreases the risk of owning the 
stock. It may even be possible to profit from a covered write if the stock declines 
somewhat. However, the covered call writer does limit his profit potential and there­
fore may not fully participate in a strong upward move in the price of the underlying 
stock. Use of this strategy is becoming so common that the strategist must under­
stand it thoroughly. It is therefore discussed at length. 
THE IMPORTANCE OF COVERED CALL WRITING 
COVERED CALL WRITING FOR DOWNSIDE PROTECTION 
Example: An investor owns 100 shares of XYZ common stock, which is currently sell­
ing at $48 per share. If this investor sells an XYZ July 50 call option while still hold­
ing his stock, he establishes a covered write. Suppose the investor receives $300 from 
the sale of the July 50 call. If XYZ is below 50 at July expiration, the call option that 
was sold expires worthless and the investor earns the $300 that he originally received 
for writing the call. Thus, he receives $300, or 3 points, of downside protection. That 
is, he can afford to have the XYZ stock drop by 3 points and still break even on the 
total transaction. At that time he can write another call option if he so desires. 
Note that if the underlying stock should fall by more than 3 points, there will be 
a loss on the overall position. Thus, the risk in the covered writing strategy material­
izes if the stock falls by a distance greater than the call option premium that was orig­
inally taken in. 
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