[smogcutter]

Sounds good in principle but how well does advice like this scale? Similar problem to Waze - side streets are great when you're the only one taking them, but once everyone does your advantage is gone. It's hard to expect a large population of amateur investors with no edge to outperform the market. In the general case, what's the marginal return on time and effort spent actively managing your money vs dumping it in a vanguard 50 and learning a different hobby?

[torkins]

That's possible, but it isn't currently the case. At a minimum, having a long vanguard 500 position has a roughly 50% + positive drift - fees chance of success. Part of the long vanguard 500 price bakes in the unlimited theoretical upside that comes along with it. Selling option contracts against that long position to give up that upside beyond a certain price reduces your cost basis and pushes your position's success rate over 50%. Repeated over many events creates a net positive expected value.

Even if there was no edge in the market, as in your premise, it's still the case that the upside of a long S&P 500 equity position is unlimited, and the upside of a long S&P 500 equity position with an option sold against it is limited, therefore would be priced to have a superior chance of success relatively speaking. More market participants would improve the price accuracy of risk, it wouldn't reduce the price of risk to zero.

As for whether its worth it, I think the aggregate effect is significant and, of course, is subject to the benefits of compounded returns, so it doesn't take much to severely outperform your other prospects in the long term. It's up to each of us to decide if its worth learning.

edit: typo

[torkins]

(replying to durkie)

I don't know about every buy-write index investments, but BXM specifically is done with essentially ATM (technically the very first strike OTM I believe) calls against the long position, then held to expiration and cash settled. In a long bull market like the present day, this approach will always underperform the market while having reduced volatility. It should overperform the market in down or sideways markets. Also, volatility induces drag so in a compounded return, all else being equal, lower volatility will yield higher returns.

Diversifying amongst uncorrelated products is an important missing feature to this strategy for the purposes of reducing volatility. If only considering writing covered calls/puts, I'd personally prefer to reduce volatility through diversification, and sell further OTM options to reduce basis so I keep more of the directional risk in each individual position and have lower transactional costs.

Also, BMX holds contracts to expiration rather than benefit from cyclicality in price and implied volatility by closing/rolling options early when they move in your favor or scaling into positions during volatility expansions.

[durkie]

it sounds like you're basically advocating something like an s&p 500 buy-write index investment instead of just an s&p index investment, right? basically selling covered calls on your index investment.

I agree with your premise, and make a pleasant bit of side-income selling covered calls on individual stocks that I own, but it seems like the buy-write indices don't actually fare well, or at least $BXM doesn't. Way worse than I would have expected actually...any idea why?

[todd8]

If the strategy worked, that would mean that calls were overpriced. Why would that be? Why wouldn't their price reflect their value?

Since indexes by themselves have such low overhead costs, more complex strategies have difficulty generating superior returns.

[durkie]

that's a good point -- i suspect the s&p 500 receives so much attention in comparison to any particular individual stock that there is very probably little change to fish out of its couch cushions