Poll - The Stock Market and Vintage Sales

[Peter_Spaeth]

Originally Posted by 1952boyntoncollector

you can roll up the calls, yeah in theory if the market goes up 30 percent you will make 20 percent etc, but assuming the market doesnt go up forever you will eventually catch up to the market with your calls and be always outperforming the market...yeah if market loses 30 percent you will still lose 20 percent etc so you will also get crushed but you will still be out performing the market..which very few hedge funds do ..

So why don't all sophisticated investors just do covered calls? It can't be this simple.

[raulus]

Originally Posted by Peter_Spaeth

So why don't all sophisticated investors just do covered calls? It can't be this simple.

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.

[BioCRN]

As a "value investor" I find it is a whole lot less work to specialize in a few fields of industry (gas/oil + air transportation for me) and only engage during times when things are advantageous. It's a low-effort way to engage in the market that requires very little "following the market" work.

I will sometimes go many months without inputting a single dollar and re-enter when a buy-low opportunity emerges.

Volume plays can turn small bumps of gains into real money. Not going all-in on the initial buy (unless it makes sense) can help hedge averaging down the buy-in if you don't have the true floor when you decide to enter.

[joshuanip]

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[joshuanip]

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[1952boyntoncollector]

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.

covered calls on SPY which is the SP index and tons of liquidity for options..

again if the market goes down you will always outperform the market because you will get some premium on the calls but will be losing money overall.

The way you dont outperform market is if the markets explodes over your calls but you will make money but not as much as the market. If market dosnt go up 30 percent a year for 3 years in a row you should be able to catch up..

lets do a real world example right now..

the SPY ticker is 563, you can sell a 630 (strike price) call in September for 500.


each call is 100 shares so for 56,300 you will make 500 dollars..if stock goes down and you lose 5,000 bucks in September, you would still out perform the market becasue you would 'only' lose 4500 becasue of the Call.

now if the SPY goes higher than 635 (630 plus the 500 you make on the call) you wont share in any more upside..but that would be an all time market high and you would now have at 63,500 dollars from the 56,300. Then you can roll it up to to 650 etc, i dont see the market going up forever and you should catch up..

obviously you can tinker with the numbers, the closer to the strike price you are to the actual current stock price the more premium but yes peter, i dont know how you wouldnt outperform the index market if you constantly sell covered calls...but again losing 25 percent instead of 35 percent etc still would not be good...just outperform the market...

in my example if the SPY got to 610 but not to 630, now you captured the 500 dollars which is better thant he market and can sell another call at whatever....some use these calls sort of as a dividend...also remember you are getting a percent or so on the SPY on your holdings a year as well...its not that hard to get 6-7 percent more on the calls you sell so in theory if the market was even all year you would still make a better return than any CD etc and better tax consequences..

[cardsagain74]

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.

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

[Balticfox]

Originally Posted by Peter_Spaeth

So why don't all sophisticated investors just do covered calls? It can't be this simple.

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.

[1952boyntoncollector]

nah it is that simple, you are 100 percent going to outperform a down market....on an up market it will have to go super super up for you to not outperform but you will still have a large profit..

what can make it more complicated if you starting selling puts to help offset any gains you are missing out of..

but there is a reason on my trading platforms for options, covered calls are 'level 1' they are the easiest and most understood and least risk..if you are going to be holding onto the stock you are doing it on for a long time

[joshuanip]

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[Yoda]

I have often wondered about the liquidity of sports cards in general. Yes, there has been a great influx of collectors entering the market, many with deep pockets and new methods to buy and sell (private equity funds), but this is not the stock and bond markets. So I wonder if the card market is liquid enough to absorb a major downturn in an orderly fashion without cratering the whole thing. Of course, some of us are pure collectors who don't care if there is a major pullback because they never intend to sell.
But, of course, the card market is unregulated, like crypto so, unlike the NYSE that has breaks when the market crumbles, there is nothing in place to stop panic card selling, just like 1929.

[Balticfox]

Originally Posted by 1952boyntoncollector

nah it is that simple, you are 100 percent going to outperform a down market....on an up market it will have to go super super up for you to not outperform but you will still have a large profit.

No. You are missing out on the large profits which make up most of the returns with which the market rewards investors:

Timing the Market Is Impossible - Hartford Funds

Originally Posted by Hartford Funds

If you missed the market’s 10 best days over the past 30 years, your returns would have been cut in half. And missing the best 30 days would have reduced your returns by an astonishing 83%.

There are also very serious problems associated with investing in an index. These actually force you to buy high, and sell low.

[angolajones]

There are also very serious problems associated with investing in an index. These actually force you to buy high, and sell low.

Can you explain this?

[1952boyntoncollector]

I didnt say cant have big losses with selling covered calls, all im saying is you will out perform the S and P index which like 90 percent of hedges funds cant claim they can do....actually just having the S and P will also outperfrom most hedge funds...you can roll up calls literally 30 percent higher than the current price every 6 months so you wont lose out on big gains, but you wont make much premium.....

[Peter_Spaeth]

From everything I have read and learned from people in the business, thinking you can time the market, or beat it over the long term with your individual stock picks, is a fool's errand for the vast majority of people.

[Peter_Spaeth]

Originally Posted by 1952boyntoncollector

I didnt say cant have big losses with selling covered calls, all im saying is you will out perform the S and P index which like 90 percent of hedges funds cant claim they can do....actually just having the S and P will also outperfrom most hedge funds...you can roll up calls literally 30 percent higher than the current price every 6 months so you wont lose out on big gains, but you wont make much premium.....

How many hedge funds are 100 percent equities? Sort of a false comparison. They are trying to manage risk as well as achieve returns.

[joshuanip]

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[Balticfox]

Originally Posted by angolajones

Can you explain this?

I thought someone would ask because very, very few people have thought through the mechanics/mathematics behind indexes.

An index you see doesn't come down from the gods. It's actually a group of stocks selected by a bunch of seasoned elders, i.e. old men, to be representative of the broad market. "Representative" though means average. So first of all this basket of stocks isn't selected to outperform. It's not about outperformance; it's about being average.

Secondly consider the stocks that make it into the index. They are those of companies that have grown to the point where they've become "established". Be nice of course if you as an investor were into these stocks as the companies were growing to the point of becoming established.

It gets worse though. If and when these stocks continue to grow in value for whatever reason, their weight in the index increases. As a holder in the index, you are therefore increasing the percentage of your "portfolio" in stocks that have already grown. You're thus buying high or at least prevented from selling high.

And when are stocks removed from the index? When the underlying companies fall upon hard times and are at death's door. Those stocks are then removed because they're no longer "representative". So as an index holder you sell those stocks at a low after riding them all the way down. Wouldn't it have been much nicer though if those stocks had been removed when they were high priced?

The most notorious example of this phenomenon was Canada's own Nortel. At its peak in 2000, Nortel represented over 35% of the value of the TSE300. The stock was removed from the index when it was down to pennies. A TSX index investor therefore automatically rode the thing all the way down!

[Peter_Spaeth]

Originally Posted by Balticfox

I thought someone would ask because very, very few people have thought through the mechanics/mathematics behind indexes.

An index you see doesn't come down from the gods. It's actually a group of stocks selected by a bunch of seasoned elders, i.e. old men, to be representative of the broad market. "Represent ative" though means average. So first of all this basket of stocks isn't selected to outperform. It's not about outperformance; it's about being average.

Secondly consider the stocks that make it into the index. They are those of companies that have grown to the point where they've become "established". Be nice of course if you as an investor were into these stocks as the companies were growing to the point of becoming established.

It gets worse though. If and when these stocks continue to grow in value for whatever reason, their weight in the index increases. As a holder in the index, you are therefore increasing the percentage of your "portfolio" in stocks that have already grown. You're thus buying high.

And when are stocks removed from the index? When the underlying companies fall upon hard times and are at death's door. Those stocks are then removed because they're no longer "representative". So as an index holder you sell those stocks at a low after riding them all the way down. Wouldn't it have been much nicer though if those stocks had been removed when they were high priced?



The most notorious example of this phenomenon was Canada's own Nortel. At its peak in 2000, Nortel represented over 35% of the value of the TSE300. The stock was removed from the index when ii was down to pennies. A TSX index investor therefore automatically ode the thing all the way down.

I thought SPY, Vanguard 500, etc. are weighted.

[Gorditadogg]

Originally Posted by Balticfox

I thought someone would ask because very, very few people have thought through the mechanics/mathematics behind indexes.

An index you see doesn't come down from the gods. It's actually a group of stocks selected by a bunch of seasoned elders, i.e. old men, to be representative of the broad market. "Represent ative" though means average. So first of all this basket of stocks isn't selected to outperform. It's not about outperformance; it's about being average.

Secondly consider the stocks that make it into the index. They are those of companies that have grown to the point where they've become "established". Be nice of course if you as an investor were into these stocks as the companies were growing to the point of becoming established.

It gets worse though. If and when these stocks continue to grow in value for whatever reason, their weight in the index increases. As a holder in the index, you are therefore increasing the percentage of your "portfolio" in stocks that have already grown. You're thus buying high or at least prevented from selling high.

And when are stocks removed from the index? When the underlying companies fall upon hard times and are at death's door. Those stocks are then removed because they're no longer "representative". So as an index holder you sell those stocks at a low after riding them all the way down. Wouldn't it have been much nicer though if those stocks had been removed when they were high priced?

The most notorious example of this phenomenon was Canada's own Nortel. At its peak in 2000, Nortel represented over 35% of the value of the TSE300. The stock was removed from the index when it was down to pennies. A TSX index investor therefore automatically rode the thing all the way down.

That's a good explanation Vai. When you own an index fund, you are buying after everyone else is buying and selling after everyone else is selling.

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