46 Part II: Call Option Strategies 
philosophy is more like being a stockholder and trading options against one's stock 
position than actually operating a covered writing strategy. In fact, some covered 
writers will attempt to buy back written options for quick profits if such profits mate­
rialize during the life of the covered write. This, too, is a stock ownership philosophy, 
not a covered writing strategy. The total return concept represents the true strategy 
in covered writing, whereby one views the entire position as a single entity and is not 
predominantly concerned with the results of his stock ownership. 
THE CONSERVATIVE COVERED WRITE 
Covered writing is generally accepted to be a conservative strategy. This is because 
the covered writer always has less risk than a stockholder, provided that he holds the 
covered write until expiration of the written call. If the underlying stock declines, the 
covered writer will always offset part of his loss by the amount of the option premi­
um received, no matter how small. 
As was demonstrated in previous sections, however, some covered writes are 
clearly more conservative than others. Not all option writers agree on what is meant 
by a conservative covered write. Some believe that it involves writing an option 
(probably out-of-the-money) on a conservative stock, generally one with high yield 
and low volatility. It is true that the stock itself in such a position is conservative, but 
the position is more aptly termed a covered write on a conservative stock. This is dis­
tinctly different from a conservative covered write. 
A true conservative covered write is one in which the total position is conserva­
tive - offering reduced risk and a good probability of making a profit. An in-the-money 
wiite, even on a stock that itself is not conservative, can become a conservative total 
position when the option itself is properly chosen. Clearly, an investor cannot write 
calls that are too deeply in-the-money. If he did, he would get large amounts of down­
side protection, but his returns would be severely limited. If all that one desired was 
maximum protection of his money at a nominal rate of profit, he could leave the 
money in a bank. Instead, the conservative covered writer strives to make a potential­
ly acceptable return while still receiving an above-average amount of protection. 
Example: Again assume XYZ common stock is selling at 45 and an XYZ July 40 call 
is selling at 8. A covered write of the XYZ July 40 would require, in a cash account, 
an investment of $3,700 - $4,500 to purchase 100 shares of XYZ, less the $800 
received in option premiums. The write has a maximum profit potential of $300. The 
potential return from this position is therefore $300/$3, 700, just over 8% for the peri­
od during which the write must be held. Since it is most likely that the option has 9 
months of life or less, this return would be well in excess of 10% on a per annum