A Reexamination of the Covered Call Option Strategy for Corporate Cash Management

 

Keith C. Brown

Scott L. Lummer

 

Financial Management 15, 1986, pp. 13-17

 

 

Abstract

Recently, considerable attention has been focused on the benefits of investing short-term corporate cash reserves in a program of hedged dividend capture. In one instance, it was shown that by writing a covered call option just prior to an ex-dividend date of the underlying stock, corporate investors could realize an increase of almost 300% over the yield offered by Treasury issues. However, recent changes in the tax code have potentially damaging consequences for the hedged dividend capture program. This paper examines the performance of the covered call option technique in the light of the new statutory provisions. Two specific cash management strategies are investigated. The results of the investigation show that hedged dividend capture is still a viable short-term investment tool for corporate managers vis--vis the usual fixed income alternatives.

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