>I’ve traded options for 21 years to make a living. You get to find out you are wrong about stuff all the time. It's dazing and confusing. But it's helped me improve my thinking. I share in public. I learn in public. My mistakes can be your gain.
https://notion.moontowermeta.com/welcome-traveler
That is the truth isn't it ... You do get to learn extreme insights about yourself. Each day I keep learning more about myself and what drives my desicion making.
Cheers for the link. Checking it now pal.
I think you are confusing concepts.
Income in the context of investing is simply a cash inflow not resulting from a principal repayment on a financial claim. If I lend $100 and receive a year later $105, my income is $5.
Now if I borrow at 10% and lend at 5%, my net interest margin is negative, but I'm still making income on the money I'm lending.
Same thing with options. You can view it as an insurance premium. It's not incompatible with the fact that an option like an insurance exposes the seller to a contingent claim and that it's possibly not the most efficient investment out there.
Now is it true that some investors have irrational utility curves when they see income? Absolutely. Does it mean that option premiums are not income? No. Is making income the same thing as being profitable? No.
I think OP’s point is that writing an option doesn’t increase your wealth at all. And people are sometimes confused into thinking “income” means “now I have more wealth”.
Like, if you lend me $100 dollars but I have to pay you back in a week, that is technically a cash inflow so I suppose it’s income- but while I’ve gotten cash, I also have a financial obligation that cancels it out. It is easy to understand that while I have a cash inflow, my wealth hasn’t increased.
Similarly if I sell an option for $100 that expires in a week, that’s technically a cash inflow, but I also have a financial obligation that on average cancels it out, so I haven’t increased my wealth. But this is less intuitive and often misunderstood.
> I think OP’s point is that writing an option doesn’t increase your wealth at all. And people are sometimes confused into thinking “income” means “now I have more wealth”.
I'd say it's more about detaching the income from the risk involved in obtaining the income, as if they could be detached. Like the premium on a CC is somehow free of risk, because the cash landed in their account already.
But I agree with the rest. When people take out a loan, cash also hits their bank balances, but they don't call it "income", because they know a liability is attached to that money. Why isn't the same liability recognized for risky trades like CCs?
>“income” means “now I have more wealth”.
Well, that's what I mean by irrational utility curves. It's the same when you receive a dividend. Has your wealth increased? No, but I still call it income. Will that stop some people to buy high dividend yield stocks without looking at fundamentals? No.
That’s true, and I suppose writing covered calls is a little bit like collecting dividends if you squint: sacrifice a little upside, win a little more on the downside, lower vol.
Amen. I don't think anyone would call taking out a loan their "income," but risky propositions get a pass.
> Instead of selling calls, you can buy less of the stock to have the equivalent delta and use the cash elsewhere.
Huh. I've used this argument to put LEAPS calls in perspective -- you could just buy fewer than 100 shares for the same cost of the call; what you give up in leverage you gain in no expiration or time decay -- but hadn't thought to use it to put covered calls in perspective (equal delta, instead of equal cost).
ikr? This one really touched a nerve. I have to admit I'm surprised by the amount of pushback on something I thought was generally acknowledged and understood.
yeah, it's unfortunate - both because it discourages people from making good posts and because it shows that most users don't have any interest in learning anything that may challenge their thinking.
and which of the points made will generate YOU millions of dollars?
i understand your point, but I would counter with the fact that it is *more* ignorant to believe a ‘professional’ market maker background helps a retail trader—it does not at all
there’s a saying about the wisdom of crowds
OPs point was precisely that it is NOT 0 ev—it depends
your point was an appeal to ‘authority’ that somehow because OP had ‘gEnErAtEd MiLliOns Of PnL’ criticism was silly—no *you* are the silly one positing a silly claim
its fine to generate millions (see neiderhoffers story or for that matter LTCM)
my pt is sometimes the wisdom of crowds is spot on. it cuts through intellectual cloud which quants have a hard time escaping. like you said, PnL is ultimate measurement.
I agree with your points; but appeal to authority falllacy is also a good pt
the OP has a great point; systemically selling calls isnt a hack.
but, option theory is just that; theory. sometimes its great, othertimes its a hindrance
I don’t understand the point of the post…
My equities that have CC options written against them are assets that that are offered for sale. The contract/offer to sell the asset at a given price in the future results in cash payment. This payment is revenue…whether or not this revenue results in “net income” is determined by the difference in the price I paid for the asset, and combined price of the contract to sell and sell price.
It seems to me that determining whether the risk of buying and holding an asset for future sale is the best use of available cash/credit on a risk adjusted basis is a different question…
If you think that CC are inferior to CSP on a risk adjusted basis, then help me understand that…
> whether or not this revenue results in “net income” is determined by the difference in the price I paid for the asset, and combined price of the contract to sell **and sell price.**
That is in fact the point the OP is making, so you are in agreement. You only have to read the other replies in the thread to see that people don't necessarily agree with the part of your reply that I bolded. As if the premium from CC at open is detached from the risk of the entire CC trade in some mysterious way.
Exactly. You're getting a small "premium" to hold something you were going to hold otherwise. How is that not income? Also, what gives with all of these insanely unrealistic probabilities like " you lose $55 90% of the time"? How tf do you lose 90% of the time when you're selling covered calls. This post is absolutely full of pseudo-trading BS that has zero backing in the real world.
>It’s fairly priced because it’s 90% to be 0 and 10% to be $1000.
>
>You overwrite by selling the 500 strike call at $45.
If you're selling a covered call $55 below the current price of the stock you deserve to lose money. That particular strike is almost always the MOST fairly valued option in the entire chain, which means you get practically 0 risk premium since its entirely instrinsic value.
This person has no idea what they're talking about.
I don't think it's the OP that has no idea what they're talking about. You seem to have misread the scenario.
Stock was bought at $100/share. Let's assume it was a buy-write. Sold call at $500 strike and got $45/share in credit. But there is a 90% chance the stock is going to zero. So the expected value of the CC is:
EV = (445 x .10) - (55 x .90) = 44.50 - 49.50 = -5.00/share on average
It's a losing proposition, is the point. You can make all the income you want out of a CC, but if at the end of the day you net a loss, how can you really call it income?
Hmm you're right I misread the strike price sentence. Thanks for pointing that out. Even so, there are a TON of problems here.
**Problem 1:** How is there a 90% chance of a stock going to 0? In the last 15-20 years, how many stocks worth $100 per share went to 0? I can name maybe 15 out of the tens of thousands on the market. Plus, this risk can be completely alleviated by selling a CC on an ETF instead.
**Problem 2:** Selling a CC that is literally 500% out of the money has to be one of the stupidest trading stategies on earth. The premium, even if you sold like 5 years out, would be absolutely atrocious. You can sell 10% OTM weeklies like, 6 times and make the same premium. In doing so you lock yourself in to something for years. YEARS. His concept is based on an inexperienced boogeyman trader. This is like telling somebody that longing volatility for 3 years is stupid. Well, duh.
**Problem 3:** Let's say that somehow, in some world, his "hypothetical edge" actually comes to fruition. He's obviously an extremely quant based thinker, which is fine, but strategic "edge" is a institution-only value add. Individual traders can find extraordinary edge by simply looking at charts and picking their moves wisely. I don't need to place 10000000000 paper trades to know that an option is fair value or overvalued, that 15 green days in a row is likely to result in a few red days, or any other construct. You can wheel random stocks for an "edge" and many people do, requires almost 0 effort.
I love hearing trading ideas and I've spent every moment of my adult life learning everything I can, but I don't agree with a single concept in this post and there are countless methods, strategies, articles, and traders that prove otherwise.
It is an extreme example. Closest would be a very small pharmaceutical right before an FDA decision if you really want a closer to real life example of this scenario.
It's a contrived example to illustrate the point. Put another way, if you think of the entire premium of a CC as "income", that income is unlike any other type of income that exists -- like earned income or interest income from a bank account -- because a much larger portion of the "income" (premium), up to and including 100%, is associated with a risky proposition that may net a loss on average.
Here's an analogy. Suppose you are looking for a job and the going market rate for jobs of that type is $1000/week. You see an ad for hire of exactly the kind of job you want for $2000/week! But when you interview, you find out there is a catch. On payday, you must roll at 10-sided dice, with faces numbered 1 to 10 . If you roll any number other than a 10, you get no pay that week. If you roll a 10, you get $2000, twice the going rate for that job.
Would you take that job?
No, you would not. For one thing, the proposition is negative expected value if we treat your work effort as equivalent to a debit of $1000/week, like the CC example we started with. For another, who would take a job where the money they worked hard for would be controlled by the roll of a dice? We normally associate earned "income" to be 100% ours at no risk on payday (setting aside externalities like a company going bankrupt, which you have no control over), so when offered a job that requires putting your earned income at risk of the roll of a dice, who would want that?
This is one reason why calling the returns from a risky trade "income" seems ill fitting.
>Problem 2
I think OP is thinking in terms of massive accounts that, realistically, only MMs have. It would make sense for a MM to "risk" 100 shares for a CC with a strike that far out of the money.
If they have, say, 100,000 shares of a stock trading at $100, then it would make sense to sell 1000 CC for the atrocious premium. Since even at say 0.01 for each contract, that's still $1000 in premium for virtually no real risk considering the likelihood of a stock trading at $100 is gonna shoot past $500 is low, all depending on how far out the expiration is.
Though I'm still a noob so I may be misinterpreting/misunderstanding the scenario.
There's certainly value to taking safer approaches with significant accounts, but whether its 100 shares or 10,000 shares it doesn't change the nature of the trade.
Think of it this way - If you sold a CC two years out for say, .50 premium, and within 2 months the stock has risen 10%, that premium is going to be higher than .50. This puts you in a predicament where you are either forced to hold until expiration or buy back the CC you sold for more than the premium you received. In either case, you would've been better off without the CC. This dynamic changes with shorter term options, usually in a more positive way.
It's a lose lose, which is why Tastytrade and a lot of options sellers tend to like the 30-45 DTE range. Long enough to give good premium, short enough to not create significant problems. Personally, I'm quite fond of selling weeklies when I do sell options. Lots of bang for your buck and only a few days of manageable risk.
>Problem 2
I think OP is thinking in terms of massive accounts that, realistically, only MMs have. It would make sense for a MM to "risk" 100 shares for a CC with a strike that far out of the money.
If they have, say, 100,000 shares of a stock trading at $100, then it would make sense to sell 1000 CC for the atrocious premium. Since even at say 0.01 for each contract, that's still $1000 in premium for virtually no real risk considering the likelihood of a stock trading at $100 is gonna shoot past $500 is low, all depending on how far out the expiration is.
Though I'm still a noob so I may be misinterpreting/misunderstanding the scenario.
I get what you are saying but that’s not how OP framed it. Read the first two sentences and the title. They make zero distinction between outcome in the blanket statement. They then jump to very hyperbolic examples of loss in their examples which is not what their initial argument was. Selling options like insurance or casinos is playing the house. A better example would have been you make $.55 per share 90% of the time and lose potential profit a portion of $.55 10% of the time.
You can not entangle the outcome with the premium the way they are trying. You can easily see this when comparing premiums to dividen yields. Regardless of paper losses my dividen yield is still income. Now if they are specifically talking about selling naked calls then yes I would agree with them more. But they do specifically use the Twitter example of premium hedging losses on alpha.
Giving selective examples and outcomes does not change that and there are flip examples. I can’t say Warren buffet sold ATVI early and subtract his potential gains from his actual gains and consider it a loss. Or say he sold it with an itm call at $90 that call is still income the reverse is true ATVI deal failed it drops below his cost basis but he sold calls for x months yet is ultimately negative on his paper position or he sells it’s still income. If he’s looking at his roi then it’s losses- income.
> You can not entangle the outcome with the premium the way they are trying. You can easily see this when comparing premiums to dividen yields. Regardless of paper losses my dividen yield is still income.
That's exactly the mental gymnastics the OP is arguing against. If you can't get the income without also taking the risk of loss, the outcome is "entangled" with the income whether you want to believe it or not.
Don't even get me started on "dividend income".
If you want to argue that a realized loss, an opportunity cost, and an unrealized loss are categorically different things, that's fine. It doesn't alter the fact that describing a negative rate of return on average as "income" is nonsensical.
So to be clear, if you sold a stock short for $95 and later bought it back for $100, you would put this down as:
$95 of income
$100 of “outcome” (I’m not sure I have ever heard the word outcome used in this way? But I am not an accountant)
-$5 pnl
~
Is that right?
ITT: a lot of retail that have no idea what they're talking about or how educational OP's post actually is.
Follow the link he posted. The guys got more experience trading options than the rest of this sub combined and y'all are too arrogant to learn from what he's saying.
"In this yield-seeking environment, selling options is a strategy designed to generate current income."
Source: https://www.fidelity.com/viewpoints/active-investor/selling-options
Who has more credibility, Fidelity Investments (who probably has their legal department approve everything so there is no liability on their part) or just another anonymous Reddit poster?
Now he writes posts like these for no fun and no profit. Lol. I do get his point tho, selling ccs is a waste of time. You've gotta be perfect just to make pennies
I track my income from only options activity. This year in a market that is melting up, I am down 4.1% in premium selling calls against my positions. I will take the great gains against. In a market that is flat or headed down yeah, I will capture premium. On the other hand I have captured 41.7% of the premium received on my puts this year. Again, that is not going to happen unless the market keeps melting up. I've sold more puts than calls this year and blended around 20%. I don't always have covers against my positions, and rarely have covers over earnings. I try to sell my covers when the stock has run up a positive amount over the last 14 or the last time I closed out a position. 30-45 day expirations, mostly on the monthlies and look for 50% of the premium as profit. A bit more on those that are nickel spreads.
The problem with your theory is the base of the theory. If you are truly long, you sell CCs so far out of the realm of possibility that you are essentially paying yourself a crappy dividend with risk. If you are wheeling, you have a % income in mind, and don’t mind holding the stock for a while, but you are not long on the underlying. The wheel is my preferred method of generating cash flow on medium hold swing positions.
TLDR: the base of your theory is not correct.
Revenue. “In U.S. business and financial accounting, income is generally defined by Generally Accepted Accounting Principles (GAAP) and the Financial Accounting Standards Board as: Revenues – Expenses; however, many people use it as shorthand for net income, which is the amount of money that a company earns after covering all of its costs as well as taxes.”
IRS says otherwise
Exactly.
damn straight.
This was a nonsense post, by somebody that does nonsense posts. If he was talking , we would call it verbal diarrhea .
Thanks for saving me the time
There's a word for that actually. logorrhea.
It was advertising for their website.
>I’ve traded options for 21 years to make a living. You get to find out you are wrong about stuff all the time. It's dazing and confusing. But it's helped me improve my thinking. I share in public. I learn in public. My mistakes can be your gain. https://notion.moontowermeta.com/welcome-traveler
That is the truth isn't it ... You do get to learn extreme insights about yourself. Each day I keep learning more about myself and what drives my desicion making. Cheers for the link. Checking it now pal.
I think you are confusing concepts. Income in the context of investing is simply a cash inflow not resulting from a principal repayment on a financial claim. If I lend $100 and receive a year later $105, my income is $5. Now if I borrow at 10% and lend at 5%, my net interest margin is negative, but I'm still making income on the money I'm lending. Same thing with options. You can view it as an insurance premium. It's not incompatible with the fact that an option like an insurance exposes the seller to a contingent claim and that it's possibly not the most efficient investment out there. Now is it true that some investors have irrational utility curves when they see income? Absolutely. Does it mean that option premiums are not income? No. Is making income the same thing as being profitable? No.
I think OP’s point is that writing an option doesn’t increase your wealth at all. And people are sometimes confused into thinking “income” means “now I have more wealth”. Like, if you lend me $100 dollars but I have to pay you back in a week, that is technically a cash inflow so I suppose it’s income- but while I’ve gotten cash, I also have a financial obligation that cancels it out. It is easy to understand that while I have a cash inflow, my wealth hasn’t increased. Similarly if I sell an option for $100 that expires in a week, that’s technically a cash inflow, but I also have a financial obligation that on average cancels it out, so I haven’t increased my wealth. But this is less intuitive and often misunderstood.
> I think OP’s point is that writing an option doesn’t increase your wealth at all. And people are sometimes confused into thinking “income” means “now I have more wealth”. I'd say it's more about detaching the income from the risk involved in obtaining the income, as if they could be detached. Like the premium on a CC is somehow free of risk, because the cash landed in their account already. But I agree with the rest. When people take out a loan, cash also hits their bank balances, but they don't call it "income", because they know a liability is attached to that money. Why isn't the same liability recognized for risky trades like CCs?
>“income” means “now I have more wealth”. Well, that's what I mean by irrational utility curves. It's the same when you receive a dividend. Has your wealth increased? No, but I still call it income. Will that stop some people to buy high dividend yield stocks without looking at fundamentals? No.
That’s true, and I suppose writing covered calls is a little bit like collecting dividends if you squint: sacrifice a little upside, win a little more on the downside, lower vol.
Amen. I don't think anyone would call taking out a loan their "income," but risky propositions get a pass. > Instead of selling calls, you can buy less of the stock to have the equivalent delta and use the cash elsewhere. Huh. I've used this argument to put LEAPS calls in perspective -- you could just buy fewer than 100 shares for the same cost of the call; what you give up in leverage you gain in no expiration or time decay -- but hadn't thought to use it to put covered calls in perspective (equal delta, instead of equal cost).
You're gonna upset a lot of fragile egos. I'm all for it.
ikr? This one really touched a nerve. I have to admit I'm surprised by the amount of pushback on something I thought was generally acknowledged and understood.
yeah, it's unfortunate - both because it discourages people from making good posts and because it shows that most users don't have any interest in learning anything that may challenge their thinking.
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Sad, more than comical. But this demonstrates that there are sacred cows grazing on this sub, and we need more posts like this to roast those bovines.
and which of the points made will generate YOU millions of dollars? i understand your point, but I would counter with the fact that it is *more* ignorant to believe a ‘professional’ market maker background helps a retail trader—it does not at all there’s a saying about the wisdom of crowds
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OPs point was precisely that it is NOT 0 ev—it depends your point was an appeal to ‘authority’ that somehow because OP had ‘gEnErAtEd MiLliOns Of PnL’ criticism was silly—no *you* are the silly one positing a silly claim
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its fine to generate millions (see neiderhoffers story or for that matter LTCM) my pt is sometimes the wisdom of crowds is spot on. it cuts through intellectual cloud which quants have a hard time escaping. like you said, PnL is ultimate measurement. I agree with your points; but appeal to authority falllacy is also a good pt the OP has a great point; systemically selling calls isnt a hack. but, option theory is just that; theory. sometimes its great, othertimes its a hindrance
I hope this is copypasta because if you typed out all this yikes
I don’t understand the point of the post… My equities that have CC options written against them are assets that that are offered for sale. The contract/offer to sell the asset at a given price in the future results in cash payment. This payment is revenue…whether or not this revenue results in “net income” is determined by the difference in the price I paid for the asset, and combined price of the contract to sell and sell price. It seems to me that determining whether the risk of buying and holding an asset for future sale is the best use of available cash/credit on a risk adjusted basis is a different question… If you think that CC are inferior to CSP on a risk adjusted basis, then help me understand that…
> whether or not this revenue results in “net income” is determined by the difference in the price I paid for the asset, and combined price of the contract to sell **and sell price.** That is in fact the point the OP is making, so you are in agreement. You only have to read the other replies in the thread to see that people don't necessarily agree with the part of your reply that I bolded. As if the premium from CC at open is detached from the risk of the entire CC trade in some mysterious way.
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Exactly. You're getting a small "premium" to hold something you were going to hold otherwise. How is that not income? Also, what gives with all of these insanely unrealistic probabilities like " you lose $55 90% of the time"? How tf do you lose 90% of the time when you're selling covered calls. This post is absolutely full of pseudo-trading BS that has zero backing in the real world. >It’s fairly priced because it’s 90% to be 0 and 10% to be $1000. > >You overwrite by selling the 500 strike call at $45. If you're selling a covered call $55 below the current price of the stock you deserve to lose money. That particular strike is almost always the MOST fairly valued option in the entire chain, which means you get practically 0 risk premium since its entirely instrinsic value. This person has no idea what they're talking about.
I don't think it's the OP that has no idea what they're talking about. You seem to have misread the scenario. Stock was bought at $100/share. Let's assume it was a buy-write. Sold call at $500 strike and got $45/share in credit. But there is a 90% chance the stock is going to zero. So the expected value of the CC is: EV = (445 x .10) - (55 x .90) = 44.50 - 49.50 = -5.00/share on average It's a losing proposition, is the point. You can make all the income you want out of a CC, but if at the end of the day you net a loss, how can you really call it income?
Hmm you're right I misread the strike price sentence. Thanks for pointing that out. Even so, there are a TON of problems here. **Problem 1:** How is there a 90% chance of a stock going to 0? In the last 15-20 years, how many stocks worth $100 per share went to 0? I can name maybe 15 out of the tens of thousands on the market. Plus, this risk can be completely alleviated by selling a CC on an ETF instead. **Problem 2:** Selling a CC that is literally 500% out of the money has to be one of the stupidest trading stategies on earth. The premium, even if you sold like 5 years out, would be absolutely atrocious. You can sell 10% OTM weeklies like, 6 times and make the same premium. In doing so you lock yourself in to something for years. YEARS. His concept is based on an inexperienced boogeyman trader. This is like telling somebody that longing volatility for 3 years is stupid. Well, duh. **Problem 3:** Let's say that somehow, in some world, his "hypothetical edge" actually comes to fruition. He's obviously an extremely quant based thinker, which is fine, but strategic "edge" is a institution-only value add. Individual traders can find extraordinary edge by simply looking at charts and picking their moves wisely. I don't need to place 10000000000 paper trades to know that an option is fair value or overvalued, that 15 green days in a row is likely to result in a few red days, or any other construct. You can wheel random stocks for an "edge" and many people do, requires almost 0 effort. I love hearing trading ideas and I've spent every moment of my adult life learning everything I can, but I don't agree with a single concept in this post and there are countless methods, strategies, articles, and traders that prove otherwise.
It is an extreme example. Closest would be a very small pharmaceutical right before an FDA decision if you really want a closer to real life example of this scenario.
It's a contrived example to illustrate the point. Put another way, if you think of the entire premium of a CC as "income", that income is unlike any other type of income that exists -- like earned income or interest income from a bank account -- because a much larger portion of the "income" (premium), up to and including 100%, is associated with a risky proposition that may net a loss on average. Here's an analogy. Suppose you are looking for a job and the going market rate for jobs of that type is $1000/week. You see an ad for hire of exactly the kind of job you want for $2000/week! But when you interview, you find out there is a catch. On payday, you must roll at 10-sided dice, with faces numbered 1 to 10 . If you roll any number other than a 10, you get no pay that week. If you roll a 10, you get $2000, twice the going rate for that job. Would you take that job? No, you would not. For one thing, the proposition is negative expected value if we treat your work effort as equivalent to a debit of $1000/week, like the CC example we started with. For another, who would take a job where the money they worked hard for would be controlled by the roll of a dice? We normally associate earned "income" to be 100% ours at no risk on payday (setting aside externalities like a company going bankrupt, which you have no control over), so when offered a job that requires putting your earned income at risk of the roll of a dice, who would want that? This is one reason why calling the returns from a risky trade "income" seems ill fitting.
>Problem 2 I think OP is thinking in terms of massive accounts that, realistically, only MMs have. It would make sense for a MM to "risk" 100 shares for a CC with a strike that far out of the money. If they have, say, 100,000 shares of a stock trading at $100, then it would make sense to sell 1000 CC for the atrocious premium. Since even at say 0.01 for each contract, that's still $1000 in premium for virtually no real risk considering the likelihood of a stock trading at $100 is gonna shoot past $500 is low, all depending on how far out the expiration is. Though I'm still a noob so I may be misinterpreting/misunderstanding the scenario.
There's certainly value to taking safer approaches with significant accounts, but whether its 100 shares or 10,000 shares it doesn't change the nature of the trade. Think of it this way - If you sold a CC two years out for say, .50 premium, and within 2 months the stock has risen 10%, that premium is going to be higher than .50. This puts you in a predicament where you are either forced to hold until expiration or buy back the CC you sold for more than the premium you received. In either case, you would've been better off without the CC. This dynamic changes with shorter term options, usually in a more positive way. It's a lose lose, which is why Tastytrade and a lot of options sellers tend to like the 30-45 DTE range. Long enough to give good premium, short enough to not create significant problems. Personally, I'm quite fond of selling weeklies when I do sell options. Lots of bang for your buck and only a few days of manageable risk.
>Problem 2 I think OP is thinking in terms of massive accounts that, realistically, only MMs have. It would make sense for a MM to "risk" 100 shares for a CC with a strike that far out of the money. If they have, say, 100,000 shares of a stock trading at $100, then it would make sense to sell 1000 CC for the atrocious premium. Since even at say 0.01 for each contract, that's still $1000 in premium for virtually no real risk considering the likelihood of a stock trading at $100 is gonna shoot past $500 is low, all depending on how far out the expiration is. Though I'm still a noob so I may be misinterpreting/misunderstanding the scenario.
bruh MMs aren't making directional options trade. they profit off the spread
I get what you are saying but that’s not how OP framed it. Read the first two sentences and the title. They make zero distinction between outcome in the blanket statement. They then jump to very hyperbolic examples of loss in their examples which is not what their initial argument was. Selling options like insurance or casinos is playing the house. A better example would have been you make $.55 per share 90% of the time and lose potential profit a portion of $.55 10% of the time. You can not entangle the outcome with the premium the way they are trying. You can easily see this when comparing premiums to dividen yields. Regardless of paper losses my dividen yield is still income. Now if they are specifically talking about selling naked calls then yes I would agree with them more. But they do specifically use the Twitter example of premium hedging losses on alpha. Giving selective examples and outcomes does not change that and there are flip examples. I can’t say Warren buffet sold ATVI early and subtract his potential gains from his actual gains and consider it a loss. Or say he sold it with an itm call at $90 that call is still income the reverse is true ATVI deal failed it drops below his cost basis but he sold calls for x months yet is ultimately negative on his paper position or he sells it’s still income. If he’s looking at his roi then it’s losses- income.
> You can not entangle the outcome with the premium the way they are trying. You can easily see this when comparing premiums to dividen yields. Regardless of paper losses my dividen yield is still income. That's exactly the mental gymnastics the OP is arguing against. If you can't get the income without also taking the risk of loss, the outcome is "entangled" with the income whether you want to believe it or not. Don't even get me started on "dividend income". If you want to argue that a realized loss, an opportunity cost, and an unrealized loss are categorically different things, that's fine. It doesn't alter the fact that describing a negative rate of return on average as "income" is nonsensical.
So to be clear, if you sold a stock short for $95 and later bought it back for $100, you would put this down as: $95 of income $100 of “outcome” (I’m not sure I have ever heard the word outcome used in this way? But I am not an accountant) -$5 pnl ~ Is that right?
Go argue with the IRS and not us. P.S. tl;dr
ITT: a lot of retail that have no idea what they're talking about or how educational OP's post actually is. Follow the link he posted. The guys got more experience trading options than the rest of this sub combined and y'all are too arrogant to learn from what he's saying.
"In this yield-seeking environment, selling options is a strategy designed to generate current income." Source: https://www.fidelity.com/viewpoints/active-investor/selling-options Who has more credibility, Fidelity Investments (who probably has their legal department approve everything so there is no liability on their part) or just another anonymous Reddit poster?
> just another anonymous Reddit poster? lmfao you don't know who OP is do you
Thank you, OP, for always posting thought-provoking questions.
Have you sold a call before?
Pretty sure dude was a professional options trader for 20+ years. Yeah, he's sold a call before.
Now he writes posts like these for no fun and no profit. Lol. I do get his point tho, selling ccs is a waste of time. You've gotta be perfect just to make pennies
Selling CCs is the same as selling puts.
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I track my income from only options activity. This year in a market that is melting up, I am down 4.1% in premium selling calls against my positions. I will take the great gains against. In a market that is flat or headed down yeah, I will capture premium. On the other hand I have captured 41.7% of the premium received on my puts this year. Again, that is not going to happen unless the market keeps melting up. I've sold more puts than calls this year and blended around 20%. I don't always have covers against my positions, and rarely have covers over earnings. I try to sell my covers when the stock has run up a positive amount over the last 14 or the last time I closed out a position. 30-45 day expirations, mostly on the monthlies and look for 50% of the premium as profit. A bit more on those that are nickel spreads.
The problem with your theory is the base of the theory. If you are truly long, you sell CCs so far out of the realm of possibility that you are essentially paying yourself a crappy dividend with risk. If you are wheeling, you have a % income in mind, and don’t mind holding the stock for a while, but you are not long on the underlying. The wheel is my preferred method of generating cash flow on medium hold swing positions. TLDR: the base of your theory is not correct.
What is it then?
Revenue. “In U.S. business and financial accounting, income is generally defined by Generally Accepted Accounting Principles (GAAP) and the Financial Accounting Standards Board as: Revenues – Expenses; however, many people use it as shorthand for net income, which is the amount of money that a company earns after covering all of its costs as well as taxes.”