Targeting Options-Based Income with Puts and Calls

John Burrello () and Han Liang
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John Burrello: Invesco Global Strategies
Han Liang: Invesco Global Strategies

Chapter Chapter 31 in Derivatives Applications in Asset Management, 2025, pp 439-445 from Springer

Abstract: Abstract The practical application of covered calls and cash-secured puts to generate consistent income while managing risk is presented in this chapter. These strategies allow portfolio managers to earn premium income by selling options on underlying assets, providing flexibility to target specific income levels while participating in market movements. The case analyzes three approaches to income targeting—adjusting strike prices, modifying portfolio weights, and combining covered calls with cash-secured puts—and evaluates their performance based on metrics like premium income, risk-adjusted returns, and downside risk. The case highlights the similarities and differences between covered calls and cash-secured puts. Both strategies share the same payoff profile when implemented with identical strike prices and expirations. However, combining the two strategies provides diversification and the ability to balance market participation and income generation. For instance, adjusting call strikes higher allows more equity-like returns, while lowering put strikes adds defensive characteristics. This flexibility enables investors to customize their strategies to meet income objectives while managing downside risk. The case also emphasizes the importance of volatility skew in optimizing option-based income strategies. Skew dynamics, where OTM puts often carry higher premiums than OTM calls, create opportunities to enhance yields and defensiveness by incorporating puts. A comparison of three illustrative strategies demonstrates that combining OTM puts and calls with variable strikes results in lower beta, reduced volatility, and more stable risk-adjusted returns compared to strategies that rely solely on calls.

Keywords: Algorithmic trading; Risk-neutral densities; Quantitative analysis; Systematic hedging; Machine learning (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-86354-7_31

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DOI: 10.1007/978-3-031-86354-7_31

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