Mr. Kadavy has answered the following questions from readers that may be helpful to others. If you have a question, please use the "E-mail Me" button above. Answers will be provided by return e-mail and, if applicable to a broad cross-section of readers, will be posted to this page:
INVESTMENT RETURNS
Q. I've collected quite a bit of premium income from writing covered calls and uncovered puts. But why would any investor want to take the other side of that transaction and buy puts or calls?
A. There are all kinds of investment strategies in the world to suit any and every investor. Many investment managers buy options in conjunction with hedging strategies. Others, both institutions and individuals as well as some investment advisory services (e.g., Bernie Schaeffer), speculate on price moves by purchasing options. The most important thing for you to know is that there are plenty of investors who are willing to take the buy-side of the option transaction so that you, the call and put writer, can take the sell (write)-side of the transaction. You can track the liquidity of options by looking at the daily volume and open-interest data for any option.
Q. I have found websites about covered call writing that suggests returns of 10% to 20% per month are achievable. How is that possible?
A. The potential rate of return on an investment is always directly proportionate to the risk the investor assumes. If one were to examine the methods these websites employ, that would become evident. Unfortunately it is not easy to discern this from the information provided. The primary purpose in making such claims, it seems to me, is to catch your attention. Unless they have that, they can't attract you to sign up for their service. Once you have subscribed, it may be too late to get your money back when you discover that the claims were either exaggerated or the risk assumed is far greater than you are willing to bear. The old saying almost always holds: if it sounds too good to be true, it probably is.
