Guess what the maintenance requirement on Amazon stock is…
which means, you can buy 100 shares for less than $100k - and then continuously write calls on that stock. Go look. Calls with roughly 30-40 days left in them that are near the money are going for about $13’ish thousand.
I could very happily collect that every 40 days for the rest of my life.
I can’t believe this. Some sucker out there is willing to pay $15 grand for a call option on Amazon?
Careful. When you’re selling a call option, you’re selling vol with unlimited downside.
That strategy pays when vol is low and range bound.
However, if AMZN shoots up, say if Q4 earnings are strong in an otherwise benign market, the margin calls on those options could be very costly.
There are perhaps other bets to make. Given vol shoukd be reducing after a busy calendar Q4, and AMZN will likely be a safe heaven stock if covid surprises to the downside, you could buy an SPX straddle and sell AMZN straddle, ATM, say, perhaps gamma adjusted. At least you’re not taking a naked unlimited downside and avoiding raw beta.
No one should take asymmetric risk with unlimited downside unless they understand the risks very well, and are prepared to lose their capital.
The risk is if amazon tanks, unlikely, but not impossible. If you’re buying with maximum margin you’re not leaving yourself much protection from a margin call, aside from the premium received on the covered call. I see your point here, but it’s not without risk. What about putting more cash into the trade (or buy less on margin) and implement the same strategy while giving yourself a little breathing room? Could also put on a collar and buy some puts as insurance. It’s actually not a bad trade in moderation.
Have to factor in the cost of margin, but if your numbers are right there i think you’ll have some company on Tuesday morning. I’d imagine that the contract prices will correct at open and that arbitrage opportunity will quickly evaporate. You’ll likely have to have a mismatch on your collar or not fully protect to have a guaranteed positive spread on the premiums (with some downside exposure).
I get it. I really do. BUT, you can’t sit there and ignore the fact that investors who aren’t as smart as we are, have been sitting at their computer screens all summer long printing out hundred dollar bills from their computer all day long and completely ignoring risk.
So, I think it just boils down to the fact y’all be peanut butter & jealous.