New Insights on Covered Call Writing: The Powerful Technique That Enhances Return and Lowers Risk in Stock Investing by by Richard Lehman, Lawrence G. McMillan (2003)

A somewhat basic treatment of covered call writing, offering a short overview of US tax implications (like writing a "deep" in-the-money call will reset the counter towards long-term holding, only LEAPS get long-term tax benefits), some "rules-of-thumb" on selecting the security, strike price, expiration and more. Studying the multi-year covered call writing results prepared by the authors for 20 large cap stocks (the data was collected from Wall Street Journal's microfiche, which demonstrates the openness of these markets well ..), the "ugly" truth rears its head. While the volatility of yearly returns decreased by 30%, the average returns were unpredictably effected, which is the consequence of the cap on maximum returns, when these calls are written. It would be hard to predict, which stocks would keep going constantly up (where writing calls is a limitation on the returns), vs. which stocks would exhibit more of a roller coaster like price change (where writing calls would add to the bottom line). Considering this, and the potential loss of preferred long-term and dividend tax rates (at least under the US tax code), writing covered calls for individual securities might not be a good idea. This is not to say, that an index or ETF based buy-write strategy or product (like BXM") offers no value, especially in a tax deferred account, where all proceeds are taxed at income rates.

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