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sorry for the spelling and grammar errors I have fixed them
-----Original Message-----
From: Sidney V. Gold <sgold@xxxxxxxxxxx>
To: Gary Funck <gary@xxxxxxxxxxxx>; omega-list@xxxxxxxxxx
<omega-list@xxxxxxxxxx>
Date: Friday, February 05, 1999 9:52 PM
Subject: Re: returns on various options strategies
>Given the volatility in todays market a covered call program I feel is an
>invitation to disaster for one's p&l.
>When you have a market with such large moves and gaps as we have had, the
best option
>strategy is to buy calls or puts on stocks where you have a reasonable idea
that the stock will move 3
>times the premium paid during 3/4 of the time remaining in the option.
>I have about 33 years experience in option trading as a founding member of
>the CBOE and have also started one of the largest option desks in
institutional stock trading and later
>commodity trading.
>To limit your upside and take most of the downward risk is not a good idea
>in today's volitile market
>You will wind up with limited returns when called and lousy returns when
>not,
>-----Original Message-----
>From: Gary Funck <gary@xxxxxxxxxxxx>
>To: omega-list@xxxxxxxxxx <omega-list@xxxxxxxxxx>
>Date: Thursday, February 04, 1999 9:41 PM
>Subject: returns on various options strategies
>
>
>>The only study that I've seen on the relative returns of convered
>>calls and other options strategies is in "The Options Strategy Spectrum"
>>by James Yates (copyright 1987). The study is outdated, and covers
>>the period 1973 to 1986. In that time period, the listed options
>>market was either non-existent, or very young (ie, illiquid,
>>inefficient), so I'm not sure how the results would compare to
>>today. It was also a time period of relatively high returns on
>>t-bills, which almost equaled the return on the S&P.
>>
>>Yates' conclusions were that a covered call strategy pretty much
>>mimicked the S&P (he looked at selling calls on 99 high cap. stocks),
>>but with a much lower standard deviation of returns. The covered call
>>portfolio had a beta of 0.45, while the beta of the S&P was considered
>>to be 1. The 99 stock portfolio itself had a slightly higher
>>beta than the S&P: 1.15. The correlation of the covered call
>>portfolio to the S&P was 0.88, which shows it tracked closely to the
>>S&P. Obviously in strong up periods covered calls underperformed, but
>>in flat to down periods they outperformed.
>>
>>Reading numbers off various tables:
>>
>> Beta Correlation Annual Return
>>S&P 500 1.00 1.00 11.3%
>>long stock 1.15 0.98 10.3%
>>Covered Calls 0.45 0.88 11.5%
>>bug stock, buy puts 0.68 0.90 8.2%
>>buy stock, sell straddles 0.88 0.93 13.0%
>>buy tbills 0.00 0.00 9.1%
>>buy tbills, sell straddles -0.22 -0.41 10.8%
>>
>>On a risk-adjusted basis, the covered call strategy looks pretty good.
>>I know of some investors who advocate a strategy that buys stock on
margin,
>>and sells covered calls against the stock. This leveraged strategy,
>>if the numbers above can be believed would have about the same
>>market risk as a market indexed portfolio, with perhaps twice the
>>return. That theory does depend strongly upon the assumption
>>that the market has an upward bias. Also, the margined return won't
>>be twice that of the S&P, because margin rates are maybe 3% above
>>the tbill rate.
>>
>>--
>>| Gary Funck, Intrepid Technology, gary@xxxxxxxxxxxx, (650) 964-8135
>>
>
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