Re: Why dont value investors write more covered calls?
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But if you buy KO at $60 thinking it's worth $90, you need to write calls at $90.
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No you don't, you should write them short term at $65 or $70 and gain all the time and volatility premium. Reasoning is that if you thought the stock would go to $90 quickly you wouldn't have bought the stock in the first place, just the calls.
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The problem is you don't want to be called out of a stock that you think is worth $90 for $65. You can always buy back in, but can lose if the stock gaps up to say, $75 on good news. Even if you don't lose when you get called out, you are increasing transaction costs, converting long term gains to short term gains and losing your ability to defer taxes, one of the most powerful advantages of buying and holding. Essentially when you defer taxes you are getting an interest free loan from the government to invest. Covered calls aren't a free lunch, you are effectively selling upside at it's intrinsic value while making your investment less tax efficient.
It is attractive to think you can make high annualized profits if you get called out quickly. But we are talking about value investors. If I buy KO at $60 thinking it's worth $90 now, that means a year from now I will likely think it's worth $105. Just buying and holding, keeping tax rates to a minimum and deferring taxes can produce very high rates of return in an investment like that. Sometimes covered calls may work great, but my guess is that most time's it's better to hold, otherwise it would mean that calls are typically over-priced.
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