The Covered Call Panacea Redux

[DeepState]

I think we just got played....& pwned, DS.

Well played, Mazzatelli!

Well....

+ XBW outperformed ASX by 1% per annum over the last ten years. After expenses and spreads, that would be close to flat. Claims of vast excess performance are not credible.
+ 3% per month is clearly ridiculous.
+ SOTA Bolli bands are around. There are many very advanced ways to calculate volatility. To imagine that the mention of SOTA with Bolli bands is a dead giveaway imagines that there are no other ways to calculate vol than via the standard Bolli formulation. The joke is poorly played, actually, because there are. It is one of those jokes that are intended to be incredulous but, in an oversight, are actually true.
+ Saying that they don't use volatility and yet use Bolli and use option premia highlights incompetence. I had a voodoo witch doctor photo ready to go.
+ Saying they care about 'rent' but not vol displays ineptitude on option pricing and mechanics.
+ The tone portrayed was clearly one of some naivety and inexperience making quite ridiculous claims.

My working hypothesis was this was that this was another trumped up claim based on voodoo that was taken quite seriously by the poster despite a clear demonstration that they had no real idea how options are priced or worked. If this is to be taken as a joke immediately....

Perhaps this highlights something when, in this context, it can be taken somewhat credibly as someone who actually believed their own voodoo despite obvious facts and inconsistencies. If this has been the outcome of my willing suspension of disbelief, I am waiting for the gazump from a lot more, a small number being truly world class. M stopped at less than a handful of exchanges. Some others seem to be going into 4 figures. Please declare yourself...


Nicely done, M. This could have been taken to a very high level if played with finesse and craftwork which accurately knew how options worked and used this knowledge more deeply. There was a great deal more potential if so. Nonetheless, it's a strong start. It has been entertaining from this end too.

 

[DeepState]

It has been entertaining from this end too.

Cynic remains the only true path to financial freedom.

 

[mazzatelli]

My working hypothesis was this was that this was another trumped up claim based on voodoo that was taken quite seriously by the poster despite a clear demonstration that they had no real idea how options are priced or worked. If this is to be taken as a joke immediately....

Perhaps this highlights something when, in this context, it can be taken somewhat credibly as someone who actually believed their own voodoo despite obvious facts and inconsistencies. If this has been the outcome of my willing suspension of disbelief, I am waiting for the gazump from a lot more, a small number being truly world class. M stopped at less than a handful of exchanges. Some others seem to be going into 4 figures. Please declare yourself...


Nicely done, M. This could have been taken to a very high level if played with finesse and craftwork which accurately knew how options worked and used this knowledge more deeply. There was a great deal more potential if so. Nonetheless, it's a strong start. It has been entertaining from this end too.

The way covered call spruiker threads usually pan out is claims are made, then a user with a low post count claiming they are a student usually enters the fray proclaiming that their educator not only is talented and the real deal, but also a nice personable guy as well. They also usually reveal they've only been paper trading &/or only live a few months and see no reason why it won't work live.

That or have they gone sophisticated - like register with ASF since 2009, make nearly 600 posts on volatility and derivatives, disappear for two years and come back claiming 3% covered calls are possible. Just maybe.....

On another note, I've never seen Bollinger bands used to price vol for ops on any trading desk. I've seen incorporating stochastic vol &/or local vol to overcome the constant drift assumptions in GBM, so what is this advanced Bolli forumla you speak of?

 

[DeepState]

1. The way covered call spruiker threads usually pan out is claims are made, then a user with a low post count claiming they are a student usually enters the fray proclaiming that their educator not only is talented and the real deal, but also a nice personable guy as well. They also usually reveal they've only been paper trading &/or only live a few months and see no reason why it won't work live.

2. That or have they gone sophisticated - like register with ASF since 2009, make nearly 600 posts on volatility and derivatives, disappear for two years and come back claiming 3% covered calls are possible. Just maybe.....

3. On another note, I've never seen Bollinger bands used to price vol for ops on any trading desk. I've seen incorporating stochastic vol &/or local vol to overcome the constant drift assumptions in GBM, so what is this advanced Bolli forumla you speak of?

1. Aye to that.

2. Wasn't interested enough to check your post history at the time. WayneL clearly had the benefit of experience from your prior posts. Nice of you to come back with some humour to inject.

3. I've never seen Bolli used to price options vol either. However, the thread you created for fun made mention of the use of Bolli to set strikes, without caring about option vol. Bolli can clearly be used for short term price forecasting of underlying. If you had the perfect system, you'd know the exact path of security prices through to the expiration of the option. Hence, with that piece of voodoo, you can set strikes without knowledge of option implied vol (for the most part). Hence my interest in the voodoo. In dream land, all this is actually within the laws of physics, and is particularly interesting if your prediction ability is truly stunning. I was curious for the way in which the voodoo and 30 mins of trading intersected to produce a strike selection (and wondering why this question was avoided twice...because that's the truly fun bit I was waiting to open up and view...for my entertainment) and also wondering what you actually were going to claim for the other 29.9 minutes between point and click. Oh the potential!!

Bolli is essentially a range informed by vol around some notion of a kernel. The kernel is usually taken as being some sort of MA for the classic case. The vol is usually estimated straight up over a specified time period (usually short term). Nothing prevents SOTA Bolli from determining a different kernel to some MA. All sorts of filters are possible. Similarly, volatility 101 is straight up sample std devn over a fixed window. Who says that can't be filtered, weighted, ... as is done all the time in risk management estimation. Nothing says that these kernels of level or vol need to incorporate only the time series under investigation either. Any form of central tendency estimation and error band is essentially a sub-class of Bolli. Some of them are truly state of the art, relaxing the fixed drift and independent, yet constant, idiosyncratic innovation assumptions embedded in GBM. The chances of this emerging were basically zero from thread content revealed...so my interest in pursuing the line of questioning was partly to see how ridiculous the line of reasoning became. Sadly, my questions in mirth were wasted on a gambit which was also concocted in mirth. I was hoping you were a believer...and willing to suspend my disbelief in that hope.

However, on the upside and hoping against experience, there was a non-zero chance that your 'mentor' actually might have known his stuff and that I could learn something after all.

Ah well, this has been fun anyway. What are you actually up to nowadays?

 

[cynic]

Cynic, are you Mazzatelli's mentor?

I was quite startled when I saw SQ's post. In fact the contents were so alarming that I called a snap audit on my underwear drawer.

Happily, I was thoroughly relieved to find (after checking, rechecking and checking again) that all my socks were present and accounted for. So I can confidently state that none of my former graduates have audaciously set up business on their own.

On a sadder note, this does mean that there's a new sock puppet in town competing for market share!

However, there's only room for one cynic in this business and you may all rest assured that when the sun comes down I'll be the last cynic still standing!

 

[cynic]

Dear Sir,

Since signing up to the Limited Edition Fully Professional Market Winning Infalibility Package and forwarding $50,000 to your account in the Bahamas, I am yet to recieve any of the course material.

Could you please look into this for me?

Regards, Mr Investor

Dear Mr Investor,

I direct your attention to the undermentioned paragraph, which may (or may not) be found on page 302 of the online client agreement document:

"In order to keep postage and handling costs down to the highly affordable low price of $19,995.95, a stamped, self-addressed envelope is also required."

Unfortunately you seem to have overlooked this essential detail when mailing your cheque.

 

[cynic]

Damn, if I hadnt put all my life savings into Cynic's marvellous system I would have happily given you my money. Especially when its proven with the reference to your mentor "doing it all the time, if not more"

That to me is the holy grail of get rich quick schemes, many offer great returns, not many can deliver great returns more than all the time!

In fact I think I might ask Cynic for my money back, this is just too good to be true.

Well, have I got some news for you!!

Yes I've got good news, some even better news and just a teency weency tiny little bit of microscopically bad news, but then there's some fantastic news to follow!

Firstly, the good news! Your money is now perfectly safe in my offshore accounts.

Now some even better news. Your investment was 100% covered by our 12 month customer satisfaction guarantee. That's right! If not completely satisfied, after 12 months, you'll be entitled to claim a full refund!!

Now that teency weency tiny little bit of microscopically bad news - the company to whom we outsource all operational functions (i.e. marketing, administration, refund processing etc.) has long since (just this past fortnight) been liquidated.

But there's no need to panic because the fantastic news is that a brand new company has just been established offering the same fantastic products from the same virtual office operated by the same nefarious personnel.
As a brand new company the long standing reputation remains completely untarnished and is free from the burden of any past liabilities (particularly those arising pursuant to the dishonoured refund guarantees of my predecessor).

But wait! There's more!

Unlike my predecessor , a ridgy didge, true blue, fair dinkum 200% customer satisfaction guarantee is now offered!!!

Yes! You read correctly!! 200% of your tuition investment will be fully refunded, if, after 12 months, you're not completely satisfied*. (Where else can you find an investment offering a guaranteed 100% annual profit?!)

*Fees and charges apply. Refer to the relevant sub-clauses in pages 5,104 and 203 of the (light reading) 356 page online customer agreement document**

**Please note that all online documentation is subject to change, without notice, and at the sole discretion of Cynicshire Throwsaway Impropriety Unlimited.

 

[cynic]

...On another note, I've never seen Bollinger bands used to price vol for ops on any trading desk. I've seen incorporating stochastic vol &/or local vol to overcome the constant drift assumptions in GBM, so what is this advanced Bolli forumla you speak of?

+1

I've never used them for that purpose on my trading desk either.

Mendacious corn crisps (fibber nachos) are far better suited to that particular aspect of analysis!

 

[cynic]

I was quite startled when I saw SQ's post....

Apologies Mazza and SQ.

That line was supposed to read "I was quite startled when I saw Mazza's post.."

(It's been quite a busy week here at Cynicshire Throwsaway.)

 

[mazzatelli]

Bolli is essentially a range informed by vol around some notion of a kernel. The kernel is usually taken as being some sort of MA for the classic case. The vol is usually estimated straight up over a specified time period (usually short term). Nothing prevents SOTA Bolli from determining a different kernel to some MA. All sorts of filters are possible. Similarly, volatility 101 is straight up sample std devn over a fixed window. Who says that can't be filtered, weighted, ... as is done all the time in risk management estimation. Nothing says that these kernels of level or vol need to incorporate only the time series under investigation either. Any form of central tendency estimation and error band is essentially a sub-class of Bolli. Some of them are truly state of the art, relaxing the fixed drift and independent, yet constant, idiosyncratic innovation assumptions embedded in GBM. The chances of this emerging were basically zero from thread content revealed...so my interest in pursuing the line of questioning was partly to see how ridiculous the line of reasoning became. Sadly, my questions in mirth were wasted on a gambit which was also concocted in mirth. I was hoping you were a believer...and willing to suspend my disbelief in that hope.

Tbh I didn't put much thought into the troll, just mentioned Bolli since most confuse asset vol with Black Scholes vol.

 

[cynic]

I just noticed a new thread with a single digit poster enquiring about yet another Covered Call educator. Have they no shame?

How dare they encroach on my territory and that of my fellow dream merchants!

 

[Dona Ferentes]

type covered calls in Search and there's a mix of promotional bumph and newbie delusion.

Here's my contribution ... a mixture of hard truths and hard sell

More on Options: Managing Risk​

By the time this newsletter is distributed, I’ll be in Washington, DC, visiting some subscribers and doing some business. But I am also visiting old friends, including the guy who interviewed me at Botta Trading, LLC, back in 1999 in San Francisco. He is a financial advisor in the DC area now, after having been an options market maker for many years. I think he likes the change of pace. We’re going to tell some old stories and have a few laughs. By the way, he is a big fan of my novel All the Evil of This World, which is about trading options at that particular point in history.

The day that I started at Botta, one of their traders was quitting. I bumped into him in the office. “Good luck,” he said. His chief complaint was that options were now multiple-listed, i.e., listed on multiple exchanges, and the competition had compressed bid-offer spreads, as expected. His view was that the edge was disappearing, and he’d better get out while the getting was good.

Well, there was a lot more money to be made after 1999, but when the electronic exchanges appeared on the scene, like the ISE, then things got really competitive, and there wasn’t much of a trading floor left post-2003. Options trading got very sophisticated, very fast, with the smartest, best-capitalized players able to compete with the best technology.

What You’re Competing Against​

Options market makers don’t even really hedge deltas anymore on individual trades—it all goes into one big mathematical soup. It’s very hard to compete.

So, if you decide you are going to trade options, this is what you are going up against. Not to make this sound nefarious—the computers aren’t ripping you off—and there are still instances in which you can find obviously mispriced options. The computers do dumb things sometimes, but I would not go into the options markets without a shotgun and a flashlight. You should at least have a baseline knowledge about options so you know just enough to be dangerous.

The other thing I’ve found about options is that you can read about them all you want, but you really need to get your hands dirty if you are going to learn. Bonds, you can learn in a class. MBAs take bond math classes every year and get smart about bonds. There is some math, but it is not too difficult. Options, you really have to immerse yourself in order to learn.

I worked on the floor of the exchange for about 14 months, and I really needed that immersion to understand what options are all about. But back then, you didn’t need a lot of sophistication—you could buy on your bid and sell on your offer, hedge your Greeks, and just make money on theoretical edge. That isn’t possible today.

Managing Risk​

The best use for options is managing risk. Like, with hedging and stuff. But let me dispel a few myths about hedging.

Everyone likes to sell covered calls. I am not a big fan. People think of covered calls as hedging. What the hell kind of hedge actually makes you get longer the stock when it goes down? That isn’t a very good hedge.

People like to think of covered calls as harvesting income. I assure you that whatever “income” you get from selling a covered call is vastly inferior to what you will get with a coupon or dividend. With covered calls, you are never happy. If the stock goes down, you are sad. If the stock goes up, you are sad. Really, the only time you are ever happy is if the stock finishes exactly at the strike, and then you have pin risk.

Give away the upside, get all the downside, where do I sign up? Still, people get seduced by the yields on these covered call funds. If stocks go down 30%, you won’t much care about the yields. But nobody teaches this stuff.

Until now…

What I’ve tried to do is to create an options course that is designed for a specific target demographic—the smart investor who uses options directionally and needs to know how they work to acquire some level of sophistication.

There are other books out there:

• Options for Dummies—it is for dummies;
• Natenberg’s Option Volatility and Pricing—for market makers;
• And Hull’s Options, Futures, and Other Derivatives—for students.

But there has never been an options course that combines the best elements of these three texts and puts them in plain language that you can understand, replete with charts and graphs.

Now, how much would you pay for these steak knives?

I hate teasing it so much, but this is going to be really good. My partners had been on my butt for years, trying to get me to create an options masterclass, and I resisted for years, knowing how much work it was going to be. And it was a lot of work. But it will be worth it.

Coming soon.

Jared Dillian