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Investing - Theory, News & General • Covered Call Strategy When You Know The Price You Want To Sell At

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Yes this is one of (maybe the only?) times when it makes sense for regular investors to engage in options, is when utilizing them as limit orders. If you’re committed to placing a limit order to buy or sell, and you’re not in a hurry, then you’d might as well get paid the premium for doing so.
This is a myth that selling options is like limit orders.

If you sell call options, then the stock price reach your strike price and goes down before your expiry date, you didn't sell it at that strike price.

You are getting paid to not sell at the strike price before expiry date.
An option is a standing limit order for 100 shares that the buyer can trade with the seller at their ‘option’. It’s not a myth it’s what it is. A contract to not do something would be weirder. That’s like a carbon credit.
It sounds counterintuitive; but you are wrong, and sharukh is correct.
Equity options are American options. Although they can be exercised early, with very few technical exceptions it is always suboptimal for the long position holder to exercise before expiration.
If the buy-write options seller thinks that the stock is worth holding up to a price of X, but not at a price above X, and writes an option in an attempt to generate additional "free" cash while accomplishing his valuation pinpoint conviction, and the underlying happens to go above X some time expiration but falls below x again before expiration, then the options seller would have (effectively) gotten paid for NOT selling when the underlying passed his perceived fair value.
Surely he could have sold the underlying anyway at the time when it passed his perceived fair value X; but by that time his options position probably lost money as the option has negative delta exposure to the underlying, while the time value decay has not yet fully materialized.

I think 99.9% of the "free income" options strategies proposed on Youtube and the rest of the internet, are baloney, not to say an insult to my intelligence.
First off, in the example, one has to question why can the investor pinpoint the fair value so accurately. For example why does he think GOOGL worth holding at $170, but not at $175. Even worse, why is the investor's asset allocation model discrete: Hold his entire current position up to $174.90, but at $175 it suddenly disappears entirely from his portfolio efficient frontier? Most equities valuation models have a high sensitivity to input assumptions, and therefore valuations have a high error margin.
Secondly, if the investor is so convinced that an individual stock is worth holding below $175 but not above $175, then why not just sell the stock when it passes $175 ? As illustrated above, using options is also a timing game, along with a speculation on realized vs. implied volatilities.
The use case of generating "income" while waiting for the underlying to reach a fair value, is baloney in my opinion. It doesn't make sense in any possible sense or scenario, once you think it thoroughly through.

I think options have very limited rational use cases. One is a directional bet with high capital efficiency (low margin requirements) due to positive gamma (the second derivative with respect to the price of the underlying) when buying or selling OTM options that are expected to go ITM, which I think is what technical analysts often do. I think that scenario could not be implemented as easily with an outright position in the underlying even with margin leverage.

Statistics: Posted by comeinvest — Thu Jun 13, 2024 1:41 am — Replies 10 — Views 1264



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