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Behavioral Aspects of the Design and Marketing of Financial Products

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Financial Markets and Investment Strategies Financial Literacy, Pension, Retirement Analysis Decision-Making and Behavioral Economics

Abstract

Many people believe the yield enhancement produced by covered options writing is the trading world's version of a free lunch. ...The writer of the call option agrees to sell a portion of the future upside appreciation of a long stock position; in exchange, the writer gains a one-time cash receipt of the option's premium. The only way the seller of the call option can gain from this deal is for a buyer to pay more than the option is worth consistently. However, common sense says this can't always happen. [R. Binnewies, What's Wrong With Covered Writes, Futures, July 1992, P. 32.]

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References

1973The Pricing of Options and Corporate Liabilities 1992Advances in prospect theory: Cumulative representation of uncertainty 1961Dividend Policy, Growth, and the Valuation of Shares 1985The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence 2008Mental Accounting and Consumer Choice 1988One share-one vote and the market for corporate control 1972THE VALUATION OF OPTION CONTRACTS AND A TEST OF MARKET EFFICIENCY 1984Explaining investor preference for cash dividends

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