Amy, RE: Are these restrictions imposed by the SEC or are they Intel-specific restrictions, i.e. do all companies have this restriction? Is the issue with the short-term duration?
What type of cov call writing (income generation) is allowed? Are these frowned upon and if so why?
John Hull could speak to Intel's specific situation if he'd like, but as far as general rules are concerned (and I am kind of fuzzy on these, too; I tend to stay far enough away from the gray line that I don't worry too much about it):
Primarily it is related to short term duration, in my mind. Short term profits are prohibited for insiders. It isn't that they cannot take any. They just must return any short term profits. They have to eat any losses. That kind of reduces the incentive for short term profits. Normal covered call selling then becomes impossible.
Note also that Intel could and does restrict the times that insiders are allowed to trade. My guess is that the window is probably open only once a quarter. That makes the cost of covered call selling almost prohibitive.
Longer term hedging is permitted, however. For example, hedging a position with both a covered call and a long put is permitted, as long as the expiration is far out. This is one of my pet peeves with the SEC regulations as currently constructed. A long put/short call on an insider's stock position essentially takes all the risk out of that stock. Yet, this is not a disclosable action. Good companies with a diverse and institutional shareholder base would still disclose this. For smaller companies, however, the use of non-disclosed costless collars is rampant. To me it is an abuse of the law, and although it complies with the letter of the law, it has nothing to do with the spirit.
One last thought is that personally, I don't think covered calls make too much sense in most cases. Note that there are a lot of smart people that have made a whole lot more money than I who disagree, though. |
