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I agree. The awful conventional wisdom that options are "riskier" than stock, that they're not appropriate for retail investors, has not done retail investors a

I agree. The awful conventional wisdom that options are "riskier" than stock, that they're not appropriate for retail investors, has not done retail investors any favors. To me, it's like saying that sharp knives are too dangerous for the home cook. If you want returns similar to professional investors, you have to use professional tools. There's a learning curve, but that's true of most things in life that are worth knowing. Edit: People downvote what they don't understand, that's fine. But if you care about this subject at some point you will ask yourself "why do retail investors underperform" and you can either throw your hands up, call it a rigged game, and blame High Frequency Trading or El Nino or whatever. Or you can look at what a professional trader does differently, and adapt those techniques yourself.

thedufer 12y ago
Statistically, professional investors don't beat the market. People aren't "downvot[ing] what they don't understand", they're downvoting demonstrably poor advice.
- encoderer 12y ago
  It's not about "beating the market." It's about retail investors underperforming professional asset managers AND underperforming the market. Tell me this: Other than reducing basis, what can you do to increase your chances of success in an investment? If success is defined as "not losing money"? One way to reduce basis is by selling covered calls on your stock positions, limiting potential profit but adding no additional risk and substantially decreasing your basis month after month. It's not rocket science, and it's not "poor advice". You and retail investors as a class have been scared into thinking that it's "riskier" to spend $300 on a call spread in Tesla than it is to go out and buy 100 shares of TSLA for around $25,000. That doesn't compute. Edit: It's not that an investment strategy that uses options is the only way to be a successful retail trader -- just like you can cook without sharp knives -- but dismissing them without being able to articulate why, well, that's not doing any favors for the regular investor. Edit: I've been here for a long time and have plenty of karma to burn in the name of standing up and making a point I believe in. Something is wrong with retail investing when, as a class, we've consistently underperformed, and at the same time we have this dogmatic insistence that options are "too complicated" for the small investor. Mutual Fund? Front Load? Compound Interest? These are all ok but writing a covered call on a stock position is verboten and scary and too hard? Please. Buying (Edit: shouldn't have said "buying", what I meant was "making money on a") stock is a 50/50 bet. (Random Walk theory; Efficient Market). The price can either go up or down. There's no reason a retail investor should not tilt those odds a few points in their favor the same way professional traders do every day.
  - deleted 12y ago
    [deleted]
  - chollida1 12y ago
    http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/the-case-against-covered-call-etfs/article18831460/ http://www.theglobeandmail.com/globe-investor/funds-and-etfs... Look you're an adult and free to do as you please but I'll try any way, please don't sell covered calls. Its very easy to make money and fool yourself into thinking you can beat the market. Its really the worst of all possible worlds... you have to hold the stock but don't get the upside when it rises. you have to hold the stock but still loose if it falls by more than the premium you still have the down side of being long the stock. All you're doing is collecting pennies infront of the steam roller that is the market. The reason indexing works is that you are always invested when the market has its big moves up. With covered calls you can't participate on the big moves up but you still get hammered when the market moves down. The reason people do it is that the market can be calm for months and then move. So you get: small income in month 1 small income in month 2 then suddenly you either miss a 25% move up by the market as you get exercised on your calls or the market drops and you lose as the market falls 15% and you've lost not only the premium from writing your calls but also some of your principle as well. Or put in laymans terms, the down side far outweighs the upside. Also be careful here: > Buying stock is a 50/50 bet. (Random Walk theory; Efficient Market). The price can either go up or down. There's no reason a retail investor should not tilt those odds a few points in their favor the same way professional traders do every day. Please note this is just wrong. There are actually 3 outcomes, which you should know if writing covered calls because you are essentially betting on the third option, which is that the stock stays flat, ie it doesn't move. My whole point is that selling covered calls does tilt the odds, just not in your favour:(
    - encoderer 12y ago
      Limiting profitability to increase probability of success is one of the principles of professional trading. Take for example, every single spread that's bought and sold. The good thing is, people have studied this. Because your argument is certainly plausible. What you leave off is that while you may "miss out" on upside, you also bank credit every month that you reinvest and compound. I called making money in stocks a 50/50 bet, but it's not. It's biased toward the upside, a premium you're given to invest instead of lending (bonds). I've seen it calculated from 3-5%. So lets call the probability of profiting when you buy a share of stock 53%. So let's talk about this study: * It's not part of the study but, we're in a 5 year bull market. So if your point about missing out on upside is true, it would certainly apply in this market. * At the beginning of the year, purchase 100 shares of every company in the Dow * Each month sell the nearest OTM call, banking the credit received * Compare P&L with a uncovered long position. By selling covered calls you reduced your basis by an average of 8% and increased your Probability of Profit to 73%. Here is a link to another website that has a write-up about the study. I emailed the research team at TastyTrade to get a link to the study itself. I've seen it on their website but can't find it now. http://probabilitycapitalgroup.com/market-studies/using-cost-basis-reduction-to-increase-the-probability-of-profit-of-buying-stock/ http://probabilitycapitalgroup.com/market-studies/using-cost... And of course the wonderful thing is anybody curious can backtest this themselves. There's a lot of ways to do it, but the trading platform Think or Swim is free. I'm not advocating what I don't understand, or what I don't have experience with personally. Honestly, i don't buy long stock very much, I prefer options strategies, but for example I'm long AAPL stock, and I've sold the $110 covered calls. Addendum: I understand the resistance. Most peoples first (and only) experience with options is buying an OTM call or put. They almost always lose their money, think 'wow what a racket' and swear it off. Moreover a general distrust of market makers, hft, etc, and people stick with the status quo. But the reason I love trading with options is because I get to pick my own probability of profit. You are right on one thing, though: The style of trading I do does not enjoy or rely on the "big win" of holding a big position that goes up huge. My style of trading is: 50 small positions in uncorrelated underlyings that give me a number of individual occurrences to let probabilities work in my favor -- to eliminate statistical variance. Edit: To be totally clear, I do not advocate buying OTM calls and puts. I'm talking about taking the other side of that trade.
pbreit 12y ago
The whole point of the article is that retail investors investing in index funds almost always beat the professionals. Options have several characteristics that make them substantially riskier. Even selling covered calls is much trickier and riskier than investing in an index fund and likely to have poorer results.
- encoderer 12y ago
  They're not mutually exclusive. For best results, you should invest in an index fund and sell covered calls on it every month. Also, there's no "risk" created from a covered call. That's the 'covered' part. There is the possibility that you could "miss out" on an up move, but the trade off is the certainty that you will collect premium every month. This is something that can be tested, and has been studied, and I encourage you to do that instead of relying on your bias here. Clearly you have some knowledge of the subject so sharpening on the finer points could be informative for you.
  - jcdavis 12y ago
    Except there are S&P 500 Buy write indexes/ETFs, and they underperform over long periods of time.
    - encoderer 12y ago
      Right, because having somebody else manage your money isn't as profitable as managing it yourself. You would agree with that I'm sure?

thedufer 12y ago

Statistically, professional investors don't beat the market. People aren't "downvot[ing] what they don't understand", they're downvoting demonstrably poor advice.

encoderer 12y ago
It's not about "beating the market." It's about retail investors underperforming professional asset managers AND underperforming the market. Tell me this: Other than reducing basis, what can you do to increase your chances of success in an investment? If success is defined as "not losing money"? One way to reduce basis is by selling covered calls on your stock positions, limiting potential profit but adding no additional risk and substantially decreasing your basis month after month. It's not rocket science, and it's not "poor advice". You and retail investors as a class have been scared into thinking that it's "riskier" to spend $300 on a call spread in Tesla than it is to go out and buy 100 shares of TSLA for around $25,000. That doesn't compute. Edit: It's not that an investment strategy that uses options is the only way to be a successful retail trader -- just like you can cook without sharp knives -- but dismissing them without being able to articulate why, well, that's not doing any favors for the regular investor. Edit: I've been here for a long time and have plenty of karma to burn in the name of standing up and making a point I believe in. Something is wrong with retail investing when, as a class, we've consistently underperformed, and at the same time we have this dogmatic insistence that options are "too complicated" for the small investor. Mutual Fund? Front Load? Compound Interest? These are all ok but writing a covered call on a stock position is verboten and scary and too hard? Please. Buying (Edit: shouldn't have said "buying", what I meant was "making money on a") stock is a 50/50 bet. (Random Walk theory; Efficient Market). The price can either go up or down. There's no reason a retail investor should not tilt those odds a few points in their favor the same way professional traders do every day.
- deleted 12y ago
  [deleted]
- chollida1 12y ago
  http://www.theglobeandmail.com/globe-investor/funds-and-etfs/etfs/the-case-against-covered-call-etfs/article18831460/ http://www.theglobeandmail.com/globe-investor/funds-and-etfs... Look you're an adult and free to do as you please but I'll try any way, please don't sell covered calls. Its very easy to make money and fool yourself into thinking you can beat the market. Its really the worst of all possible worlds... you have to hold the stock but don't get the upside when it rises. you have to hold the stock but still loose if it falls by more than the premium you still have the down side of being long the stock. All you're doing is collecting pennies infront of the steam roller that is the market. The reason indexing works is that you are always invested when the market has its big moves up. With covered calls you can't participate on the big moves up but you still get hammered when the market moves down. The reason people do it is that the market can be calm for months and then move. So you get: small income in month 1 small income in month 2 then suddenly you either miss a 25% move up by the market as you get exercised on your calls or the market drops and you lose as the market falls 15% and you've lost not only the premium from writing your calls but also some of your principle as well. Or put in laymans terms, the down side far outweighs the upside. Also be careful here: > Buying stock is a 50/50 bet. (Random Walk theory; Efficient Market). The price can either go up or down. There's no reason a retail investor should not tilt those odds a few points in their favor the same way professional traders do every day. Please note this is just wrong. There are actually 3 outcomes, which you should know if writing covered calls because you are essentially betting on the third option, which is that the stock stays flat, ie it doesn't move. My whole point is that selling covered calls does tilt the odds, just not in your favour:(
  - encoderer 12y ago
    Limiting profitability to increase probability of success is one of the principles of professional trading. Take for example, every single spread that's bought and sold. The good thing is, people have studied this. Because your argument is certainly plausible. What you leave off is that while you may "miss out" on upside, you also bank credit every month that you reinvest and compound. I called making money in stocks a 50/50 bet, but it's not. It's biased toward the upside, a premium you're given to invest instead of lending (bonds). I've seen it calculated from 3-5%. So lets call the probability of profiting when you buy a share of stock 53%. So let's talk about this study: * It's not part of the study but, we're in a 5 year bull market. So if your point about missing out on upside is true, it would certainly apply in this market. * At the beginning of the year, purchase 100 shares of every company in the Dow * Each month sell the nearest OTM call, banking the credit received * Compare P&L with a uncovered long position. By selling covered calls you reduced your basis by an average of 8% and increased your Probability of Profit to 73%. Here is a link to another website that has a write-up about the study. I emailed the research team at TastyTrade to get a link to the study itself. I've seen it on their website but can't find it now. http://probabilitycapitalgroup.com/market-studies/using-cost-basis-reduction-to-increase-the-probability-of-profit-of-buying-stock/ http://probabilitycapitalgroup.com/market-studies/using-cost... And of course the wonderful thing is anybody curious can backtest this themselves. There's a lot of ways to do it, but the trading platform Think or Swim is free. I'm not advocating what I don't understand, or what I don't have experience with personally. Honestly, i don't buy long stock very much, I prefer options strategies, but for example I'm long AAPL stock, and I've sold the $110 covered calls. Addendum: I understand the resistance. Most peoples first (and only) experience with options is buying an OTM call or put. They almost always lose their money, think 'wow what a racket' and swear it off. Moreover a general distrust of market makers, hft, etc, and people stick with the status quo. But the reason I love trading with options is because I get to pick my own probability of profit. You are right on one thing, though: The style of trading I do does not enjoy or rely on the "big win" of holding a big position that goes up huge. My style of trading is: 50 small positions in uncorrelated underlyings that give me a number of individual occurrences to let probabilities work in my favor -- to eliminate statistical variance. Edit: To be totally clear, I do not advocate buying OTM calls and puts. I'm talking about taking the other side of that trade.

pbreit 12y ago

The whole point of the article is that retail investors investing in index funds almost always beat the professionals. Options have several characteristics that make them substantially riskier. Even selling covered calls is much trickier and riskier than investing in an index fund and likely to have poorer results.

encoderer 12y ago
They're not mutually exclusive. For best results, you should invest in an index fund and sell covered calls on it every month. Also, there's no "risk" created from a covered call. That's the 'covered' part. There is the possibility that you could "miss out" on an up move, but the trade off is the certainty that you will collect premium every month. This is something that can be tested, and has been studied, and I encourage you to do that instead of relying on your bias here. Clearly you have some knowledge of the subject so sharpening on the finer points could be informative for you.
- jcdavis 12y ago
  Except there are S&P 500 Buy write indexes/ETFs, and they underperform over long periods of time.
  - encoderer 12y ago
    Right, because having somebody else manage your money isn't as profitable as managing it yourself. You would agree with that I'm sure?