Why dont value investors write more covered calls?

[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.

[pig4bill]

Desert Cat's last two posts exemplifies my response above, people are greedy. That's why they don't do covered calls.

[ahnuld]

wow I totally forgot about the taxes. I guess it makes sense when you think a stock is approaching IV and you are ready to dump and move on, but yeah, the fact that your money grows tax free is huge.

[pig4bill]

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wow I totally forgot about the taxes. I guess it makes sense when you think a stock is approaching IV and you are ready to dump and move on, but yeah, the fact that your money grows tax free is huge.

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All you have to do is roll your calls forward before expiration. There's a chance they may get exercised early, but it doesn't happen often.

[Jimbo]

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otherwise it would mean that calls are typically over-priced.

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Correct, particularly on the first day after expiration of the prior months calls. I really didn't know that a value investor implied a "long term" investor. I agree about the tax implications but if you have been in the stock for over a year already (like my MSFT example) getting called out has no tax implications and you would have still had the short term gains.

Sure covered calls are not for everybody or for every stock, it is just that people on this board (especially people who have never written a single one in their life) dismiss them out of hand, often without considering when they are practical and profitable. Not saying this is you, it just appears to be the general consensus. Like everything else in the market writing them successfully takes some time, some work and some guesswork about both the market in general as well as the specific stock.

Jimbo