Geoff, first, have a happy Thanksgiving.
Back to options. I agree with everything that you said. Maybe I am incorrect, but I understood that we began this discussion with the idea of seeing high returns on writing covered calls. For this reason I considered the case of a covered call only. It seems to me that the discussion centered around whether it was more profitable to write such calls on a short-term basis (30 days), or on a longer term basis (90 days). My discussion was aimed solely at that point. I am in the habit of writing far out of the money short-term (<45 days) calls on stock that I already own. In looking at the results I discovered that I am generating about 2.5% per month in extra income (that includes the rare cases where I have had to repurchase the call on the day of expirey). This does not include fluctuations in the price of the underlying security, which I would want to hold in any case. Nor does it include transaction fees. In looking at the actual data available at the time I wrote the calls (i.e. the bid/ask for available calls) I found that the monthly return I would have achieved had I opted for 90 day writes would have fallen to under 2% per month. Not all of the data are available because some of the 90 day options would have not expired. And, as I pointed out to you in a previous post, in several of those cases I noticed that the implied volatility was greater for short-term options than for their longer-term counterparts. If the game were fair, wouldn't you expect that implied volatility be constant?
New topic: Now you are certainly correct that theoretically the EV of options is equal to the risk-free interest generated (neglecting spreads and transaction costs etc.). This assumes that pricing is fair. But I believe that we both noted that pricing may not be fair. Furthermore, the plug nature of implied volatility really seems to be a rationalization of pricing rather than a predictor. If it were fair you might expect that implied volatility could be derived from beta, but it can't. Sure, we know that betas are unstable and trend towards 1.00, but what does the variability of implied volatility tell us about how fair the game is?
Again, have a happy holiday.
TTFN,
CTC |
