Options Trading for the Institutional Investor: Managing Risk in Financial Institutions

6. Options as Cash Generators

Covered call writing is a conservative strategy. The key is in exploiting time value premium for calls written on carefully selected high-quality stocks. For the strategy to make sense, your basis in stock must be below the strike price, the option premium must be adequate to justify the risk of exercise, and you must know the tax ramifications beforehand. Tax rules for short options are odd and complex, but you cannot ignore them.

The covered call is among the most attractive of conservative option strategies. It provides an impressive rate of return when properly structured, and it does not increase the most common forms of risk. In fact, you reduce your market risk—your exposure to lost value in your stock—with ...