Chapter 25: LEAPS 39S 
✓,,FREE" COVERED CALL WRITES 
In Chapter 2, a strategy of writing expensive LEAPS options was briefly described. 
In this section, a more detailed analysis is offered. A certain type of covered call 
write, one in which the call is quite expensive, sometimes attracts traders looking for 
a "free ride." To a certain extent, this strategy is something of a free ride. As you 
might imagine, though, there can be major problems. 
The investment required for a covered call write on margin is 50% of the stock 
price, less the proceeds received from selling the call. In theory, it is possible for an 
option to sell for more than 50% of the stock cost. This is a margin account, a cov­
ered write could be established for "free." Let's discuss this in terms of two types of 
calls: the in-the-money call write and the out-of-the-money call write. 
Out-of-the-Money Covered Call Write. This is the simplest way to approach 
the strategy. One may be able to find LEAPS options that are just slightly out-of-the­
money, which sell for 50% of the stock price. Understandably, such a stock would be 
quite volatile. 
Example: GOGO stock is selling for $38 per share. GOGO has listed options, and a 
2-year LEAPS call with a striking price of 40 is selling for $19. The requirement for 
this covered write would be zero, although some commission costs would be 
involved. The debit balance would be 19 points per share, the amount the broker 
loans you on margin. 
Certain brokerage firms might require some sort of minimum margin deposit, but 
technically there is no further requirement for this position. Of course, the leverage 
is infinite. Suppose one decided to buy 10,000 shares of GOGO and sell 100 calls, 
covered. His risk is $190,000 if the stock falls to zero! That also happens to be the 
debit balance in his account. Thus, for a minimal investment, one could lose a for­
tune. In addition, if the stock begins to fall, one's broker is going to want maintenance 
margin. He probably wouldn't let the stock slip more than a couple of points before 
asking for margin. If one owns 10,000 shares and the broker wants two points main­
tenance margin, that means the margin call would be $20,000. 
The profits wouldn't be as big as they might at first seem. The maximum gross 
profit potential is $210,000 if the 10,000 shares are called away at 40. The covered 
write makes 21 points on each share - the $40 sale price less the original cost of $19. 
However, one will have had to pay interest on the debit balance of $190,000 for two 
years. At 10%, say, that's a total of $38,000. There would also be commissions on the 
purchase and the sale.