[DesertCat]

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implied vol was very low in a mkt trending upward so often value investors over the past 5 years probably didnt want to cap their upside. now that implied vols are at very high levels i'd guess that you are going to see more and more covered call writing as the risk-reward profile improves.


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are you suggesting that implied volatilities are currently/will soon be higher than actual volatilities? or that implied volatilities were lower than actual volatilities over the past 5 years? what is your reasoning for suggesting that the risk-reward profile is improving?

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with a few exceptions, implied vol generally trades above realized vol. in times of panic, implied vol almost always trades above historical vol.

Implied vols now are way higher now than they have been over the last 5 years. the option market prices a one std deviation move in the S&P over one trading day to be ~1.75% over the next year. Over the last 5 years this number has been right around 1% or less.

If you are doing a buy write, you are selling an option. If the implied vols are high, the option is more expensive.... So when you are selling something more expensive, your risk reward looks more attractive.... You are selling something that you can get more juice for now than you could before... Of course, times are different now and you run the risk of not participating in big upward movements in the market if you decide to buywrite. That being said, if the markets turn around and start to trend higher, implied vols will decrease so you can always buy back the option you are short and make money on just the fact that the vols went down.

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Jason, you realize we are talking about value investors, right? And that value investors rarely care about volatility? Typically value investors like options in situations where they have a good estimate of the likelihood of a specific business event happening, and the resulting value created from that event, and that allows them to value options regardless of what volatility is.

And I think the reasons I covered in my response to Jimbo address why most value investors don't use covered calls.