164 Part II: Call Option Strategies 
Example: An investor places a "good until canceled" stop order to buy 100 shares of 
XYZ at 57 at the same time that he establishes the original position. If XYZ should 
get to 57, the stop would be set off and he would then own 200 shares ofXYZ and be 
short 2 calls. That is, he would have a 200-share covered write of XYZ October 50 
calls. 
To see how such an action affects his overall profit picture, note that his average 
stock cost is now 53; he paid 49 for the first 100 shares and paid 57 for the second 100 
shares bought via the stop order. Since he sold the calls at 6 each, he essentially has a 
covered write in which he bought stock at 53 and sold calls for 6 points. This does not 
represent a lot of profit potential, but it will ensure some profit unless the stock falls 
back below the new break-even point. This new break-even point is 47 - the stock 
cost, 53, less the 6 points received for the call. He will realize the maximum profit 
potential from the covered write as long as the stock remains above 50 until expira­
tion. Since the stock is already at 57, the probabilities are relatively strong that it will 
remain above 50, and even stronger that it will remain above 47, until the expiration 
date. If the buy stop order was placed just above a technical resistance area, this prob­
ability is even better. 
Hence, the use of a buy stop order on the upside allows the ratio writer to auto­
matically convert the ratio write into a covered write if the stock moves up too far. 
Once the stop goes off, he has a position that will make some profit as long as the 
stock does not experience a fairly substantial price reversal. 
Downside protective action using a sell stop order works in a similar manner. 
Example: The investor placed a "good until canceled" sell stop for 100 shares of 
stock after establishing the original position. If this sell stop were placed at 41, for 
example, the position would become a naked call writer's position if the stock fell to 
41. At that time, the 100 shares of stock that he owned would be sold, at an 8-point 
loss, but he would have the capability of making 12 points from the sale of his two 
calls as long as the stock remained below 50 until expiration. In fact, his break-even 
point after converting into the naked write would actually be 52 at expiration, since 
at that price, the calls could be bought back for 2 points each, or 8 points total prof­
it, to offset the 8-point loss on the stock. This action limits his profit potential, but 
will allow him to make some profit as long as the stock does not experience a strong 
price reversal and climb back above 52 by expiration. 
There are several advantages for inexperienced ratio writers to using this 
method of protection. First, the implementation of the protective strategies - buying 
an extra 100 shares of stock if the stock moves up, or selling out the 100 shares that 
are long if the stock moves down - is unemotional if the stop orders are placed at the