Exxon...An example of income generation from covered calls

[FreeGoldRush]

this argument applies to all trading for all market participants as everyone in the ocean has a shark chasing them.

My argument does not apply to all trading. Not everything is efficiently priced. My argument only applies to market makers who offer options.

The only way this covered call strategy will work is if you first calculate the value of that option and then find it mispriced. If the strategy doesn't include a discussion around how to properly price the option then it's pointless. You can't just pay what Goldman Sachs is asking and expect that you will siphon money from them.

 

[newwurldmn]

Every security has a thousand phds at a thousand smart hedge funds and banks looking to get an edge.

It’s not an argument against covered calls, unless you are saying trading any options strategy isn’t profitable. There are many on here who have made a lot of money trading options despite the big bad phds with their collocated servers, billions of dollars, and preferential treatment on the exchanges.

My argument does not apply to all trading. Not everything is efficiently priced. My argument only applied to market makers who offer options.

 

[FreeGoldRush]

Every security has a thousand phds at a thousand smart hedge funds and banks looking to get an edge.

That is not true. I earn a full time income running my own quant algorithms. There are places in the market where banks, hedge funds and their math phds cannot trade efficiently. Once you understand how these firms work and what their challenges are then you know where to look for the places they cannot operate efficiently.

It’s not an argument against covered calls, unless you are saying trading any options strategy isn’t profitable. There are many on here who have made a lot of money trading options despite the big bad phds with their collocated servers, billions of dollars, and preferential treatment on the exchanges.

I am not saying that all option strategies are BS. No way. What I'm telling you is that the covered call strategy as specified by the OP is insufficient to be profitable. The only way it could work is to first calculate the price of those options that is required to make it work and then find someone that will buy them from you at that price. In the case of Exxon it is extremely unlikely that you will fulfill the second part of this requirement. There is extensive liquidity with Exxon and options on it are priced with high efficiency.

 

[newwurldmn]

You have proven my point. Your argument doesn’t hold. You can earn despite all those Hft’s and smart quant and fundamental funds pricing risk quickly.

a covered call’s largest risk is delta. He might be selling vol at an edge loss but his delta will dwarf that.

But he may not be selling at an edge loss. market makers historically have wanted to buy vol so they will sell vol at a premium.

That is not true. I earn a full time income running my own quant algorithms. There are places in the market where banks, hedge funds and their math phds cannot trade efficiently. Once you understand how these firms work and what their challenges are then you know where to look for the places they cannot operate efficiently.



I am not saying that all option strategies are BS. No way. What I'm telling you is that the covered call strategy as specified by the OP is insufficient to be profitable. The only way it could work is to first calculate the price of those options that is required to make it work and then find someone to sell them to you at that price. In the case of Exxon it is extremely unlikely that you will fulfill the second part of this requirement. There is extensive liquidity with Exxon and options on it are priced with high efficiency.

 

[FreeGoldRush]

You have proven my point. Your argument doesn’t hold. You can earn despite all those Hft’s and smart quant and fundamental funds pricing risk quickly..

I never made the argument that it isn't possible to be profitable trading. lol. You are putting up a strawman argument. The OPs option strategy is not profitable *as he has stated it*. He hasn't even calculated the price he needs to sell his options at to be profitable and he is assuming the entire revenue he gets from selling them goes straight to his bottom line. This is 5 year old behavior. You have to calculate the price you need to be profitable and then find a buyer that will pay that price or better.

 

[newwurldmn]

I never made the argument that it isn't possible to be profitable trading. lol. You are putting up a strawman argument. The OPs option strategy is not profitable *as he has stated it*. He hasn't even calculated the price he needs to sell his options at to be profitable and he is assuming the entire revenue he gets from selling them goes straight to his bottom line. This is 5 year old behavior. You have to calculate the price you need to be profitable and then find a buyer that will pay that price or better.

I guess I see your point about the option price. he’s long 50 shares and short 1/2 a straddle at inception. He’s trading a terminal payout. That straddle may or may not be priced in his favor but he doesn’t know. The long share dwarfs his pnl. I certainly wouldn’t call the premium “income.”

I had an issue with your comment about how the strategy can’t work because the banks have phds making markets on it. But that’s me being pedantic.

 

[FreeGoldRush]

I guess I see your point about the option price. he’s long 50 shares and short 1/2 a straddle at inception. He’s trading a terminal payout. That straddle may or may not be priced in his favor but he doesn’t know. The long share dwarfs his pnl. I certainly wouldn’t call the premium “income.”

I had an issue with your comment about how the strategy can’t work because the banks have phds making markets on it. But that’s me being pedantic.

My statement about quants at Goldman was not meant to be general and apply to everything. Bottom line is that if you want to win you have to explore a lot of strategies and you *must* know what you can sell at or buy at to be profitable. You can't just go to Goldman and take whatever they are offering for the option you want. You will get annihilated that way. Goldman may very well price inefficiently at times but you have to know what number you are looking for. And you won't find it on Exxon where the stock and its options are nearly the most studied in the market.

 

[Cabin111]

First, I am not good/great with math. I am/was a business man/investor, who has amassed millions (with an s...Thank you God) over the years. I was ADHD as a kid...I grew out of it at about age 16...Most of my math had passed me by. I got my BA, but only had to get past pre algebra in high school...I was a stoner back then. I was a Realtor and knew some math concepts...But not that good. I know business better than math. If you put a contract in front of me, I can tell you "or" should be in this location rather than "and". I read and understand the fine print of most contracts. Math, it is what it is.

At my age, I wish to hold and retain assets. I will hit for the fences with some trades, but for the most part I am comfortable with a 4-10% return on my money.

Why is "preserve assets with income" such a strange concept to many of you?? You would put your widowed grandparent in Tesla vs ADM?? Really...Really??

Ray Kroc (McDonald's) made 1-2 cent on his hamburgers to begin with!! I am not looking for 1-2 cents...But I am looking for steady income with say 200 $20-$200. dividends per year. Also (though I have cut back on my CCs), 10-20 covered calls paying $50-$2,000. per year.

I pay NO taxes. My CPA charged me and my wife $500. to do our taxes. Our Roth IRAs are worth 3/4 of a million dollars.

I thought the story told a simple way to look at CCs and income generating. I do believe it works for a certain part of society that NEEDS to preserve income.

If I was 40 years younger, I would pursue other avenues of income with stocks. I can't...Age and health won't let me.

Take it up with the author...He must be a idiot.

Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ

 

[FreeGoldRush]

Why is "preserve assets with income" such a strange concept to many of you??

It's not a strange concept. You just don't like the reality of the math.

Options are a side bet. It's a zero sum game. You and Goldman don't both somehow win.

They win exactly like a casino does. When Goldman Sachs sells you a covered call they will let you win most of the time because it massages your non-mathematical brain into feeling good. You get dopamine hits and see green on your account. But sometimes your stock gets called away and they win when that happens. Big time. When they price the option you can be 100% certain their math phds are pricing it so they win more money than you in the long run. That's how the math works and the reason they make a few billion dollars every quarter.

Please don't take this the wrong way but the market and the math do not care about your wants, needs or high level subjective feelings regarding a saving and trading strategy. It doesn't care that you worked hard and made smart decisions in life and are comfortably retired. I enjoy reading about that. Good job! But Goldman does not care.

You can't make 1+1=3 no matter how you feel about it. I honestly don't mean this to be rude. You must first lay aside all the subjective reasoning you have provided and simply realize the numbers don't add up in your favor. You don't want to go through the math so you'll have to trust someone else that knows this is true. I know it's true.

 

[Cabin111]

It's not a strange concept. You just don't like the reality of the math.

Options are a side bet. It's a zero sum game. You and Goldman don't both somehow win.

They win exactly like a casino does. When Goldman Sachs sells you a covered call they will let you win most of the time because it massages your non-mathematical brain into feeling good. You get dopamine hits and see green on your account. But sometimes your stock gets called away and they win when that happens. Big time. When they price the option you can be 100% certain their math phds are pricing it so they win more money than you in the long run. That's how the math works and the reason they make a few billion dollars every quarter.

Please don't take this the wrong way but the market and the math do not care about your wants, needs or high level subjective feelings regarding a saving and trading strategy. It doesn't care that you worked hard and made smart decisions in life and are comfortably retired. I enjoy reading about that. Good job! But Goldman does not care.

You can't make 1+1=3 no matter how you feel about it. I honestly don't mean this to be rude. You must first lay aside all the subjective reasoning you have provided and simply realize the numbers don't add up in your favor. You don't want to go through the math so you'll have to trust someone else that knows this is true. I know it's true.

You sound very condescending. So, you believe this author is wrong??

If I were to take an industry (say oil), and Trump shuts down the country. Oil futures go negative, and I buy Exxon or BP and do a leap...Goldman would influence that trade??

Or take present day...I buy a chip ETF in a year or two. We know it will take years to move manufacturing back to the US. Are you telling me Goldman controls the chip making process to the whole world?? Market makers and Goldman may control daily prices...But, they do not control a whole stock industry with a 2-4 year projection!!

Another simple example from a couple years back...The government is printing money like a drunken sailor. Buying and holding ADM and Bunge (BG) or even doing a leap would not make sense?? Great total return with very little downside...Esp if the leap is way out of the money. People would run to safety and security during a recession and high inflation...A basic no brainer!!

It can be done with the right companies and timing...