[anthony_r]

Ah yes, selling volatility via covered calls. The institutional investors' second favourite way of collecting "extra income" in the zero rates world, second only to explicit leverage.

Some of them sold much more volatility, via variance swaps, with quite disastrous results.

https://www.institutionalinvestor.com/article/b1lffwvwdh7xtq...

[3pt14159]

I mean, my family's investment company is far, far from being an institutional investor, but the math is pretty solid. If our plan is to buy Apple and sell it in the next six months if it rises by 15% then it is pretty easy to justify selling the calls with a strike at 15%, which I know isn't perfect because if something substantial changes at Apple (a new product, say) then in the case where the calls weren't sold you could re-evaluate your target, but that type of event doesn't happen too frequently and if we would have put a sell order at 15% above anyway it's a near-free increase in returns. Because inflation eats the first couple percentage points and taxes don't take that into account the delta in gains does stack up over time.

Selling puts, though, is a fools game unless the market has already really tanked. Black Scholes isn't perfect, yadda, yadda.

[Calamity]

Out of curiosity, what's your total return with this approach if, at expiry, the stock price matches the strike price? In other words, how much are you making with the premiums you collect?

I guess one issue with this approach is that it somewhat assumes a period of low-inflation between now and option expiry (unless you're factoring that into the 15% expected return).

[3pt14159]

Because options are at a premium right now, for the reasons stated above, running the above strategy on Apple looks like this:

Buy at $400 (price at time of writing) sell an option at $460 for January which comes with a $42 premium[0] at time of writing, so if the stock goes up 15% over the six month period the total return is $102 per share, or about 25% return. If inflation is, say, 4% per annum due to Covid pushing it a bit higher than normal, then the total return is ~23% vs what would have been ~13% for doing the same play without selling the option, so the real return is around 75% higher than the alternative where the option was not sold.

Usually it's around 30% more, so right now is an especially good time for this play if you think that Apple will at least hold its value.

[0] https://finance.yahoo.com/quote/AAPL220121C00460000?p=AAPL22...

[eaenki]

It will never cease to amaze me. LTMC is my favorite story

[sbierwagen]

LTCM