If you can swing trade successfully, you should be able to get good return with itm and possibly more with otm on a long term basis. But the majority of the time your otm will expire - $ nursebee knows what he is doing.
Actually if you run the math using Black Scholes, you will find long term, long calls have positive returns better than investing in the underlying for calls around ATM. However from a CAPM basis the Sharpe ratio is no better than underlying plus Black Scholes is just an approximation, so most financial experts don't go there. Regards and peace, not trying to create a debate.
I would be interested to see this evidence as there is lots of research out there that shows buywriting outperforms the index by about 1%/annually over a long period of time. The two claims are not consistent.
Actually the previous post rings a bell, I remember a study where 1 year long calls (don't remember if atm or slightly otm) midly outperform 1 month short puts atm (over 1 year) which outperforms buy and hold. A bit surprising indeed, it would be worth digging that study and see how it's calculated, some leverage must have been used on the long call side.
newwurldmn, I am not an economist nor am I a finance person, just a layperson. Here is what I understand from reading economic books. So my comments are theoretical, not real life cases or simulations. From the CAPM (Capital Asset Pricing Model): E[ri] = r + E[rm − r]βi where E[ri] = expected return of the option asset ri r = risk free interest rate rm = rate of return of the underlying Bi = Beta of the call option asset ri, a measure of volatility You can calculate Bi from the Black Scholes equation and it is always greater than the Beta of the underlying. In the original paper on Option Pricing written by Black & Scholes, they said call options should give you positive returns compared to the underlying because of leverage and that Bi > B of underlying. This is true when the expected return or the underlying is positive. And, the Beta of OTM is greater than the Beta of ITM so OTM calls should have higher returns. Since, if you go long term, most underlying have positive returns, so theoretically call options should do better than holding the underlying. Of course in real life Black Scholes is only an approximation and market makers are not stupid so they charge a volatility premium (usually, implied volatility > historical volatility) to compensate for them taking the short side and the end result is that in most cases long calls do not have an advantage. This, together with commission/slippage, means us small investors will not win. The other side of the coin is from the principle of Put-Call parity it means Puts are expensive. Perhaps that is why most experts here said shorting Puts or Calls were more profitable. However, us small investors are at a disadvantage since brokerage houses demand that if we short puts or calls they tie up our capitals so the combined returns are in most cases not much better than holding the underlying. If you run through the equations, the only thing covered calls or covered puts buy you is lower volatility not higher absolute returns. Don't know if I am making any sense. Regards,
From what I read, most of the studies said buy-write gave lower volatility but not necessarily better absolute returns. Theoretically, buy-write reduces Beta and therefore is not as volatile as the underlying. I think to get higher returns you need to do more than mechanically doing buy-write, you need to have a "recipe". Regards,
Why was it denied? Fill out another application and fudge the questions to satisfy the broker. They do not confirm your answers. Keep in mind you can't trade options in a cash account - you will need a margin account.
ironchef, I appreciate the explanation, but none of this is true. The black-scholes equation has nothing to do with CAP-M. You can interpolate Beta from the volatility of a stock and the volatility of an index but that's about it. No security can have a beta > 1 in the long run otherwise it will eventually have a price of infinity. That is why most models blend realized beta with 1 to cause it to drift to the mean. Secondly if you treat an option as an asset by definition it will have a Beta < 1 just by virtue that it has delta <= 1. This isn't the right way to look at Beta, but options move less (in $ terms) than the underlying does.
I have an OX account. It is not difficult to get level 1 & 2 from OX. Level 0 is buy stocks/bonds/mutual funds. Level 1 is covered calls/ sell stocks short. Level 2 is to buy calls and puts + cash secured puts write You should be able to get level 1 easily. Level 2 you need to answer a bunch of questions before they approved. You just have to say you have some experiences with options which looks like you have.
As I said my back ground is not finance so I am somewhat ignorant. Lets see, this is the Black Scholes equation: From it you can calculate Bc, the Beta of the call options: where, X is the strike price and Bc the Beta of the call options, Bs the Beta of the underlying. The Bc calculation did include the dividend rate lambda which the call option calculation ignored. In this equation, Bc is always > Bs And I assumed you can use CAPM and Bc to link the expected returns of the call option and the underlying. I would appreciate your comments and coaching so I can better understand the ins and outs of finance.