What Part Of Selling Calls Is “Income”?

Selling calls “for income” is not a thing. You can sell a call as compensation for risk but no professional options trader thinks of an option sale as “income”. They might mark-to-model and book the premium over “fair value” as theoretical edge, or simply “theo”. And even then we are talking about pennies. Just a tiny fraction of the stock price that they are long.

Nobody serious can claim the entire premium is income. I’ve discussed this before but if you’re stubborn here’s a few more angles to this.

A simple math example

You’re long a $100 stock.

It’s fairly priced because it’s 90% to be 0 and 10% to be $1000.
You overwrite by selling the 500 strike call at $45.

Did you earn income?

What if you sold the call for $55?

My problem with the “selling calls for income” crowd…they don’t know the difference.

Some people’s personal utility curves can make even a negative edge seem like an ok hurdle.

A courageous response to my question on Twitter:

There is no problem here. You take your $45 and move on with your life. If you get called away you make 5x, and if your stock goes to $0 you came out with only a 55% loss.

Umm, incinerating money when you think you are investing is actually what I would call a “problem”.

You make $445 10% of the time and lose $55 90% of the time. You are literally better off betting on roulette.¹

If you overwrite a call that’s actually worth $1 at a price of $.95 because call markets are faded low for sellers, you are stuck with roulette odds. Factor in your brokerage costs (implicitly or explicitly) and effort.

I’d rather get a free hotel room.

Other framings

Instead of selling calls, you can buy less of the stock to have the equivalent delta and use the cash elsewhere.
You could buy puts and buy MORE of the stock than you originally intended.

You cannot think about selling calls without thinking of vol in some fashion.

Selling options profitably requires being able to tell the difference between these scenarios, properly accounting for what portion of the sale is “income” vs fairly probability-weighted premium.

If you can do that, go ahead and claim you sell calls for income. That’s the bar. Not “premium arrived in my brokerage account”. I’m trying to show that the decision to trade an option has nothing to do with income and everything to do with the proposition you are being offered.

The reality is that betting against mispriced options is a game of pennies or half- pennies. It’s low signal-to-noise. Realizing and validating the edge requires large sample sizes. If you are overwriting without a deep process you likely have no idea if you have edge and your sample is too small to know.

If that’s not clear, check out my version of trading 101:

Understanding Edge (10 min read)

If you use options to hedge or invest, check out the moontower.ai option trading analytics platform

The house edge in roulette with double zero’s is 5.26%. In the overwriting example, you lose 5% in expected value. Subtract commissions from the option trade and add comps to the casino play, and you are better off going to Vegas. (The Vegas vs option “vega” joke is there for the taking if anyone wants it.)

editor