That would be suprising as many income strategies (invest in high dividend yield stocks) run covered call strategies (effectively selling out-of-the-money calls) because their investors prefer downside protection. These strategies do this in a largely price-inelastic manner so I would expect their to be positive expected value in buying these options.
I’ll re-read Ilmanen on the subject when I get a chance.
That would be suprising as many income strategies (invest in high dividend yield stocks) run covered call strategies (effectively selling out-of-the-money calls) because their investors prefer downside protection. These strategies do this in a largely price-inelastic manner so I would expect their to be positive expected value in buying these options.
I’ll re-read Ilmanen on the subject when I get a chance.
Selling calls benefits from OTM calls being overvalued. I’m talking about going long OTM calls. Am I missing something?
Right, I’m saying there is a conflict between these two facts that I don’t know how to resolve.
Ah, you’re saying that because a lot of funds sell OTM calls no matter the price, you’d expect the returns to be positive.
I think the explanation is just that there’s an even larger group of people who buy OTM calls due to lottery-ticket biases, and this effect wins.
Hmm, maybe. Do you know who does this? Is this retail investors?
See also “Do Call Options Have High Expected Returns?”