A simple method for amateur investors to analyze covered call options

  • Greg Samsa
Keywords: option pricing theory; truncated Gaussian distribution

Abstract

We describe a simple method which amateur investors can use to analyze covered calls.  The most basic version is based on the formula for the expectation of a truncated Gaussian distribution, and it can be generalized to accommodate other assumptions.  This approach might be especially considered during a time of market overvaluation, such as the present.  During such times, investors should shift their preferences toward writing deep-in-the-money covered calls, which provide a greater margin of safety while monetizing the (probably optimistic) expectations of other market participants regarding future returns.

References

[1] https://www.investopedia.com/terms/b/blackscholes.asp
[2] https://en.wikipedia.org/wiki/Truncated_normal_distribution
[3] https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp
[4] Samsa G. What do you do if you’ve been at the poker table for twenty minutes and still can’t spot the sucker? Implications for individual investors. Archives of Business Research. 2018: 6(6). DOI:http//dx.doi.org/10.14738/abr.66.4787, online 28Jun2018.
Published
2020-01-28