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Introduction to Trading and Investing with Options (Collection) by Michael C. Thomsett, W. Edward Olmstead, Guy Cohen

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5. Options as Cash Generators

Covered call writing is a conservative strategy. The key is in exploiting time value premium. For the strategy to make sense, your basis in stock must justify the short position, the option premium must be adequate to justify the risk of exercise, and you must know the tax ramifications before you open short positions. 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, market risk—your exposure to lost value in your stock—is reduced with the covered call strategy.

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