Covered calls create synthetic dividends on stocks you own
“So a covered call is when I own a stock and I own the stock for the reasons why I would own any stock, even if I'm not considering options. I'm selling that person the right to buy the stock from us at a specific price, which is usually a higher price. So in a lot of ways, it's akin to using a limit order to sell a stock that you believe is overvalued or overpriced. But the really great thing about it is that I'm selling someone that right. I'm collecting money that I get to keep whether or not the stock goes up and that person wants to exercise his or her right to buy the stock from me at that higher price or not.”
Market makers profit from spreads, not market direction
“So having started out as a market maker, sometimes referred to them as dealers now, it's kind of the same thing, We traded with a much, much different style. Market makers are just absorbing the liquidity. Market makers say, hey. Look. I'll buy it at $2. I'll sell it at $2.10. I don't really care if I buy it or sell it. I'm gonna hedge off the directional risk anyway. And so when I left the trading floor and started trading in a retail account, I mean, I had all this professional level knowledge, but, gosh, I had to learn a whole different way of trading.”
The wheel strategy cycles covered calls and cash-secured puts
“For me, one of the main functions that I do as an investor with options is I use this tool that we call the wheel, And we call it the wheel because it kind of rotates from one trade to another, and it's a continuous cyclical process. And there's two components to it. So let me introduce the two components of this thing I call the wheel, which are covered calls and cash secured puts.”
Align options strategy with your investor psychology, not hype
“You have to understand how to make it work with you, not with what you see on x or what you see on the Internet or some Yahoo out there telling you to take your mortgage out and put it in options. It's stupid. Don't do that. So if it doesn't fit with you, don't do them. If you like the math, you're into the math and it makes sense to you and you can do it properly, I highly recommend getting advice. Ideally, you have to align your strategy with what works for you with your investor psychology, as well as align with your desire of happiness.”
Covered call ETFs lose your best stocks to upside calls
“So here's the problem with a covered call portfolio. If you have a portfolio of 10 stocks, let's say, say, you got your 10 stocks in there and you write covered calls in all of them. The problem is is the good stocks, the ones that go up a lot, will get called away, And you will not benefit from that upside. You'll get the downside, but you won't get the upside. So what do you have left? You have a portfolio of mediocre stocks, the ones that aren't going up.”
Knowledge is the only real barrier to using options
“Look, investing for yourself is a business. And with any business, there's always barriers to entry. And the more barriers to entry, the more fruitful the business. And the only barrier to entry when it comes to adding options to the investing you're already doing is knowledge. And they say the more you learn, the more you earn, and that is about as true as it can ever be when it comes to investing and especially with options.”
Options can lower risk while improving long-term returns
“As far as investors go, one of the great things is that you can use options to lower your risk while improving your returns. We're trained to believe that if you want greater returns, you have to take higher risk, which is, generally speaking, true. But when we use some more sophisticated strategies, we're able to kinda tilt that scale just a little bit more in our favor, and that makes a huge difference. If you lose less, I don't have to sell anybody on the concept of losing less. That's great. But if you can make more, even if it's a little bit more, because investing is about compounding, those returns compound at a greater rate, and you just see these exponential benefits over time.”
Options are like fire — heat your house or burn it down
“One is, you know, there was a friend of mine long ago. He used to say, options are like fire. You can use it to heat your house or to burn it down. And, you know, it's kinda sage advice. Somebody once told me, you know, you shouldn't say that. You're gonna scare people away, but fear is a good emotion.”
Selling options has a small statistical edge, not a guaranteed one
“If you just blindly know nothing about options, do nothing about options, and you sell them, you do, on average, over time, statistically, have this small extra edge, which is important. But that is on average, statistically, over time. It doesn't always exist. Sometimes options are overpriced by two or three or four or 5%, but sometimes they're underpriced. So I'm a fan and advocate of using what we call volatility analysis.”
Most CPAs avoid options because they don't understand them
“I had a client I'd worked with for many years, and he moved to Florida and got a new CPA. I was using covered calls with him to generate extra income. So I get a call, and the client's like, yeah. I'm moving my accounts. I'm like, why? And they're like, well, my CPA said you have me in dangerous options. I was like, did he ask me what I was doing? No. He didn't. Does he know what I'm doing? No. He doesn't. Because covered calls are the most conservative options.”
