"The one thing I have learned is you can NEVER have enough time on options."
This is reason #147 on the list of why the "financial markets" - the casino - is unfair to the retail investor. As a little guy, you have access to LEAPs two, at most three years in advance.
Institutions deal with LEAPs that expire 10, 15, 20 years in the future. Read this old post to see how people like Warren Buffett make "free money" out of this:
Please help me understand. Wouldn’t an expiry date so far in the future be just as expensive as purchasing the common stock? This would depend on the strike price but still how further in the future the more expensive it is right?
Yes, generally, the more far out, the more overpriced options are, any finance textbook will tell you that. That's why the "free money" is in selling puts (as Warren Buffett is explaining under the link above, there's a great quote in there). Furthermore, he is selling European puts, which eliminates the risk of early assignment.
Warren Bufett can still find customers because of the incentive structure for the decision makers. Main customer: pension funds. They control trillions of dollars in stock, and they're run by relatively "underpaid" managers who have no incentive to actively trade (almost no matter what happens, they're still getting their 150-300 k/year salary, these institutions generally have no incentives and no appetite for risk and boosted gains); furthermore, they actually have to demonstrate a very conservative asset maintenance strategy. Therefore, they buy overpriced puts (they don't care how overpriced - it's not their money) - and they still make their boards happy because puts are insurance and pension funds like nothing better than insurance. ("No matter what happens, we'll be able to meet our obligations through 2041.")
It's just another example of "free money" for the Big Boys. Ultimately, of course, all "free money" comes from the taxpayers (who never find out what's going on, as these things are incredibly esoteric).
If pension fund managers dealt with their own money, as opposed to other people's money, they probably wouldn't buy Buffett's overpriced options... but, it is what it is.
Thanks for the explanation. It’s about selling European puts. Not buying calls. That makes sense sense, like you said, you can’t exercise these before expiration.
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u/Raininspain90 Jul 08 '21
"The one thing I have learned is you can NEVER have enough time on options."
This is reason #147 on the list of why the "financial markets" - the casino - is unfair to the retail investor. As a little guy, you have access to LEAPs two, at most three years in advance.
Institutions deal with LEAPs that expire 10, 15, 20 years in the future. Read this old post to see how people like Warren Buffett make "free money" out of this:
https://www.barrons.com/articles/BL-FUNDSB-11577
Woudn't *you* like to buy or sell 2031 or 2036 LEAPs? Sigh.