Poll - The Stock Market and Vintage Sales

[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