No. of Recommendations: 14
<<Talk about irony. I suppose you didn't notice where he said this is working for him? >>

Anecdotes aren't evidence. Not his, not mine, not ttm's, not anybody's. They can be useful to indicate dangerous things (e.g., "sold a naked call on AMZN and will be washing dishes for the rest of my life"). But stories about getting away with something don't prove (or even demonstrate) that it is safe.

For example, I sat on a jury where a guy always ran the stop sign at the end of his block. He said that there was never any traffic on the cross-road and he had been ignoring that stop sign for several years--and that he figured it was safe because he had never even *seen* a car on the cross-street. 'course, one day there *was* a car there, which was why he was in court.

You are better off having a good (and accurate) understanding of what's going on, and the theory behind it. The theory and observed reality had better be in agreement--not only is it not nice to fool mother nature, it's impossible (in the long run).

As far as I can see, the theoretical background of covered calls says that:
a) they have exactly the same risk/reward as naked puts, yet one is considered low-risk and one is considered high-risk. DISCONNECT! The same thing cannot be both safe and risky. This alone should have caution bells going off.
b) CCs involve more trades, hence higher transaction costs (commissions and spreads) than naked puts.
c) The theoretical understanding says that a CC writer will have a large number of small wins (collected premiums), a number of flat-out losses, and a small number of very large forgone gains. In absolute dollar amounts, the forgone gains swamp the collected premiums.
d) CC writers focus on the *number* of times they win, which is the wrong thing to look at. Who cares how many times you won the coin-toss? What counts is the aggregate numbers of dollars you win, not the number of times you win. So whats-is-name is regularly raking in 2-3 dollars a month over and over again. Cool.

Meanwhile, the astute call *buyer* is buying stuff like SEBL calls at 14 and selling them for 68 a few months later. And BVSN calls at 20, then sell at 144. And too, AMTD calls at 7, then sall at 3/8.

Yup, whatsisname beats that pants off of me in number of wins. In the 3-4 months I hold, he can turn over 3 or 4 CCs and pick up a couple-three bucks, while I blow out half my long calls at a loss, and then get a handful of calls that return me 7 or 8 times my original investment. How many CCs does he have to win to match the $124 that my BVSN made? If he makes 3 bucks each, that 41 CC wins. So maybe he does that okay (and I doubt the odds are that good)----he still has (at best!) 41 commissions and 41 spreads. If he does any buy-backs it gets worse. Versus my 2 commissions and 1 spread.

e) Wade Cook pounds the drum for covered calls. This is an automatic wave-off. Anything he says is most probably the exact wrong thing to do.
f) CC writers tend to get quite voluable and emotional when confronted with opposing arguments. Good clue that they are investing according to their emotions rather than according to cold, hard statistics. Me, I don't claim to be a genius--and your insults are rude and gratuitous. I just sit off in the corner with my green eyeshades on, raking in the bucks that the mathmatically-challenged toss my way.

Knowing that options are a zero-sum game, I used to feel a tad guilty about making money at it. Hence my warnings to CC writers. Once I warn them off, my conscience is clear, because after that point they are no longer ignorant but have explicitly chosen to follow a path that benefits me to their detriment.

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.