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It's called a covered call position. If it was that risk-free and easy, then every hedge fund would be already on top of this and quickly bring prices back into
by TheCowboy 13y ago
It's called a covered call position. If it was that risk-free and easy, then every hedge fund would be already on top of this and quickly bring prices back into parity.
Unfortunately, you still expose yourself to the risk of holding the stock, while putting a hard cap on the upside.
You have to hold 100 shares to cover 1 option. A decline in the price can quickly add up to a significant loss, not to mention when you actually have to sell your position when the calls are exercised.
- gfodor 13y agoI never said it was risk free or easy, and hedge funds do sell covered calls. The point is there is a well known and understood asymmetry between the long and short options markets due to the capital needed to write options. Intuitively the reason there is alpha for selling options is likely at least in part that you are letting people with little capital access leverage.