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
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-à-vis the usual fixed income alternatives.
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