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Jesse posted a article in Trading Blog“The CBOE S&P 500 30-Delta BuyWrite Index is designed to track the performance of a hypothetical covered call strategy that holds a long position indexed to the S&P 500 Index and sells a monthly out-of-the-money (OTM) S&P 500 Index (SPX) call option. The call option written is the strike nearest to the 30 Delta at 10:00 a.m. CT on the Roll Date.The BXMD Index rolls on a monthly basis, typically every third Friday of the month.” Historical index data is available since July 1986 to compare the performance of BXMD to the S&P 500 Total Return Index. The below chart created at www.portfoliovisualizer.com highlights the summary statistics and equity curve with portfolio 1 representing BXMD. Past performance doesn’t guarantee future results. You cannot invest directly in an index. From July 1986 – December 2018, BXMD outperformed the S&P 500 by 0.43% per year. Since the only difference is the short call, this tells us that selling a 30-day call every month has been a profitable trade over time. Since a short call is negatively correlated to the underlying index, it results in a slight reduction in portfolio risk where standard deviation, worst year, and maximum drawdown are all reduced. Alternatively, in months where the S&P 500 increases by more than expected, the short calls lose money and BXMD underperforms. Overall, I prefer to think of put options as financial insurance and call options as lottery tickets. In both instances, it’s rational to expect sellers to profit over time (but not every time). As a covered call seller, you retain almost all of the downside, yet cap your upside. In a world of generally efficient markets, why would any rational market participant do this without the long-term expectation of profit? This theory matches the empirical data. Additional recommended reading on covered calls: AQR: Covered Calls Uncovered AQR: Covering the World: Global Evidence on Covered Calls Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.
I am a beginner and staring to learn about options, I have a question about selling covered calls and would be grateful if someone could help me understand it please If I have an online broker that deals in equities./stokes but not options (lets calls this broker B1), then I have another online broker who deals with Options but not equities/stoke (lets call this broker B2) So I buy 100 shares in XYZ copr from B1, and XZY stock is trading at $50 per share (so I pay approximately $5,000) I then go to broker B2 and sell a call option (covered call as I own XZY) on XYZ at a strike price of $60 per share therefore 1 contract is for $6000 at what every premium I get Now the holder of the option exercises his option so it is assigned to me, but my Stock is held with a separate broker so how does the option get tied back to 'my particular share holding' that I already have' ? or does it not actually work like that and in essence I just need to give the buyer who exercised the option 'the money' (rather than the actual shares) at the current market value so he/she can go buy the stoke right now on the open market at the current price ? (or should that be I have to give him/her the difference in price between the strike price and current market price, rather than the full market price) If I have to give the person who exercised the option the money (as above), than as I see it this leaves me with two choices going forward, either sell my shares at the current market price to get back the money I just paid out (minus fees) or carry on holding on to my shares in case it goes up even more ? I would be very grateful if someone could help me understand how the above all fits together when it comes to covered calls. Thanks CXMelga (Charlie)