Quote:
Originally Posted by raulus
We’ll see what Jake has to say. But I would posit a few hypotheses:
1 - there are some real limits to the scale. At some point, the market becomes oversaturated with people writing call options, and not as many people buying them. That would cause the price to fall, which would wipe out your gains. So you can probably write calls for a few thousand shares, and maybe even tens of thousands, but once you’re writing millions or hundreds of millions, you’re going to move the market. And most sophisticated shops are investing at scale.
2 - this strategy probably works best with stocks where there is a lot of interest from individual investors. Think Tesla, or GameStop. Particularly when the good times are rolling and the “number go up” crowd is feeling its oats. In these cases, they’re hyper optimistic and will pay good money to buy the right to buy the stock in the future for a price that is well above today’s price. I’m guessing that those excessively exuberant individual investors essentially over-pay for this right because they have so much confidence in their prognostications.
3 - this strategy probably works best when the market is going up up up. Once sentiment turns more dour, particularly for those individual investors, the demand for these call options probably declines, so the market demand and price paid for the options will similarly decline.
Just spitballing here, but those would be my thoughts about why it’s difficult to replicate this strategy always and everywhere at maximum scale.
Plus there’s that tax issue I raised earlier, where income earned using this strategy is taxed heavily.
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Not to mention the capital needed to write covered calls. And for options with small premiums relative to the underlying asset value, how the "income" from those premiums adds up so slowly.
Between this and expensive spreads in illiquid spots, commissions, etc....I've always guessed that in theory, options were a similar negative sum game (on both sides) for dart throwers. They're too overpriced to go long with a positive EV, yet all the extra costs and limitations with being short may be just as bad.
In the end, not much different than having to lay -110 on either side of a game in a sportsbook