Poor Man's Covered Call vs traditional long stock portfolio

[Bastion_01]

You want to limit the discussion to CC to prove a point that there is adequate empirical data from BW-funds. I get that you're more interested in proving a point than making money.

I have no problem posting a real-time model portfolio (real, confirmed trades) of SPY overwrites against the SPY for one year, but I'd like to wager on the outcome. I am paying 5x if I don't beat the TRS of the SPY over one year's time.

Rules inviolate: Buy 100 SPY and short 2 quarterly (HMUZ) calls against the positions. 20D strike modeled using BSM/binomial/whatever is agreed upon. Calls are rolled (at mkt) upon a strike-touch into the next quarterly series.

If you're so certain you're correct then you're a fool not to take me up on my public offer.

You 're really worked up about this, haha, relax man.

I didnt mean to embarrass you, for all it's worth it's ok if you simply cant express your logic yet, it's not a big deal I've been through it too. You being right or wrong doesn't change my PnL, i wouldn't care.

i just wanted to see a credible course of reasoning from someone. any ways have a good day.

 

[Bastion_01]

IIRC, the last person to take a bet against a long-term position call like this got wasted by Dest.

@Bastion_01 Try it in sim, see how it works out, before you make a real-money bet.

I used to do the same when i was a kid, try to change the subject when i have a hard time explaining myself.
*Investor: "how do you expect these trades to make money in the next 5 years?", Me "You dare to quesition me? How about you just wait and if it makes money you give me more money?" How do you think the investor had responded?

 

[morganpbrown]

covered calls, or any variations of it, underperforms against simply buy & reinvest-dividends of the index. https://www.cboe.com/us/indices/dashboard/bxm/

There you can see BXM (SPX Buy Write) underperfoming vs. SPX, which doesn't even include the dividends.

Replacing stocks with leaps is even worse since now you're giving up on the dividends; another way to look at it is, you're investing in companies but you have to periodically distribute part of your invested assets to stock holders...

You’re right about the drag from lost dividends. Short term capital gains are another drag, unless you roll your leaps after 366 or more days

 

[Bastion_01]

You’re right about the drag from lost dividends. Short term capital gains are another drag, unless you roll your leaps after 366 or more days

thanks. i looked up black scholes valuations again. it looks more like an expectation for dividends are discounted, so with leaps you are betting on not just vol, but also changes in expectations of future dividends.

 

[destriero]

You asked for a "source." OVL is wholly comprised of SPY buy-writes. It outperformed SPY buy and hold YTD. I haven't looked beyond that as I don't trade buy-writes/synthetic puts.

Anyone can beat a passive hold simply by going out far enough on the call write. That's the logic. Buy write funds fail in dot shots for the obvious reason that they write too close to the market. They are not meant to beat passive SPY in runaway bull mkts. The charter is an optimized TRS. And they outperform (ideally) in Bears.

Asking why a BW fund isn't beating the index in a massive bull market is kinda stupid.

The CBOE buy-write index underperforms bc they are shorting 30D or whatever. It proves nothing. The goal is to improve upon the risk-adjusted return of a passive index. If the goal was to win this argument they would simply write the highest strike call.

Who in this thread said it was the divs?

The BW-fund must stick to its charter and be fully invested so they must roll the vol-position if it trades ITM. They can't just get called and call it a day. Comms, edge loss, microstructure, Derman delta (upside call vols increase with moneyness). A multitude of losses, expressed in vol, as a result of a forced trade.

 

[Bastion_01]

thanks for the reply, that's closer to what i thought may be the reason for your argument. Ive seen research suggesting both otm options being expensive, or fair (especially commodity futures options).
What the bxm data implied is that these options are indeed morce expensive than fair most of the time, and it took 1 year of bullish period + increased realized vol to erase previous 10years of alpha. there is also a 20pct otm buy erite index, with nearly identical performance.

look up the vol trade primer from cboe, theres a few pages explaining exactly what types of macro, realized vol periods favor/hurt covered calls/put selling; therefore, implying that with transaction costs, even if the options are fairly priced, selling them mechanically without bias, timimg is likely negative ev, and the trader would simply be betting that a raging bull market will never occur again.

at the end of the day, i think you would agree that having skill in vol forecasting is the key to maxing alpha here. option trading isn't free money.

the div thing was regarding valuation of leaps.

 

[morganpbrown]

Bro, just model the thing out to Oct15.

I will do this. Dusting off my Black-Scholes modeling sheet as we speak, but may take me a while to get to it (day job). Interesting to look at a short cash-secured put or put spread as an alternative to the CC/PMCC. Same net delta as the CC/PMCC, but the other greeks are completely different, as you say. Hopefully modeling will help me intuit the significance. Thanks very much for your help.

 

[destriero]

I will do this. Dusting off my Black-Scholes modeling sheet as we speak, but may take me a while to get to it (day job). Interesting to look at a short cash-secured put or put spread as an alternative to the CC/PMCC. Same net delta as the CC/PMCC, but the other greeks are completely different, as you say. Hopefully modeling will help me intuit the significance. Thanks very much for your help.

You're not going to keep the deferred beyond Oct so just model it at flat vol out to Oct 15. Again, I'd go vertical unless you want to roll into Nov at Oct exp.

 

[longandshort]

You 're really worked up about this, haha, relax man.

I didnt mean to embarrass you, for all it's worth it's ok if you simply cant express your logic yet, it's not a big deal I've been through it too. You being right or wrong doesn't change my PnL, i wouldn't care.

i just wanted to see a credible course of reasoning from someone. any ways have a good day.

just fyi, @destriero and @newwurldmn are experts in this topic... they are not your run-of-mill retail traders with a "system" lol. if you can't discern the wheat from the chaff you have a lot to learn.

 

[taowave]

Wait...Wut????

Those 2 f$%^ers dont have a system???

just fyi, @destriero and @newwurldmn are experts in this topic... they are not your run-of-mill retail traders with a "system" lol. if you can't discern the wheat from the chaff you have a lot to learn.