Quote:
Originally Posted by Peter_Spaeth
So why don't all sophisticated investors just do covered calls? It can't be this simple.
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You're right. It's not that simple. The computer models calculate what "would" have happened over the decades with such a strategy. But that's not real world, and in the real world there's many a slip 'twixt cup and lip. In the real world your trading influences prices.
If you're a little guy, you won't really move prices much but just try selling calls. They're illiquid so you'll end up selling at the bid which (if they even exist) are put in place by sophisticated traders with computerized mathematical models that are designed to give them not you an edge. Moreover you'll pay some kind of commission.
If you're a big fund, your activities always move the market but in the opposite direction you want, e.g. your buying increases prices while your selling depresses prices. Now you will probably be able to find a big brokerage firm willing to act as a counter party for your options, but remember what I said about their sophisticated mathematical models designed to make them money? If these models weren't making them money, they wouldn't be in that business for long. Therefore as a fund your employment of an option strategy consists of betting against the pro traders at brokerages who have a long successful history of making money being on the other side.
So you're right. Not only is it not that easy, it's pretty damn difficult.
