He sees AI and nuclear war as the top threats to investors. “Valuations” is #3.
intercst
8 Likes
I like Warren’s description of the stock market. The stock market is a church with a casino attached. The one day options is gambling not investing.
We do know that Berkshire has sold off quite a bit of its holdings and is sitting on ~$400 billion waiting for an opportunity.
It seems obvious, to me, that Berkshire feels the market is pricey and locked in some profit.
7 Likes
At minute 4 in the video:
The casino has become very attractive to people. If you are buying one day options or selling them…
- That is not investing
- That’s not speculating
- It’s gambling
I’m glad to hear that Warren Buffett is in tune with me, options are neither investments nor speculations, they are gambling. If so, which side should one take, the house or the gambler? Casinos are rigged in favor of the house. If you pick the right covered calls to sell, the odds are rigged in your favor.
The Captain
3 Likes
I’m liking this AI feller!
I asked, “Who do the odds favor, the option call buyer or the option call seller?”
Google AI:
Statistically, the odds heavily favor the option call seller (or writer) over the call buyer. Sellers have a higher probability of profit, often estimated at 60–75%, while buyers often have a probability of profit under 30%.
Here is the breakdown of why the odds favor the seller:
Why Odds Favor the Call Seller
- Time Decay (Theta): Options are wasting assets. Every day that passes without a major move in the stock price, the option loses value. The seller collects this daily decay as profit.
- Lower Bar for Success: A call seller wins if the stock stays flat, drops, or rises slightly (less than the premium received). A call buyer needs a significant, fast move upward in price, direction, and timing to win.
- Overpriced Volatility: Historically, implied volatility (the price of the option) is higher than the actual realized volatility that occurs. Sellers collect this higher premium, essentially selling “expensive” insurance that rarely needs to pay out.
Risk/Reward Summary
- Call Seller (Writer): High probability of winning small, consistent amounts (limited reward) but faces high risk (potentially unlimited losses if the stock skyrockets).
- Call Buyer: Low probability of winning, but potential for high, asymmetric returns (limited risk/premium paid, unlimited potential reward).
Bottom Line: The seller is analogous to an insurance company (collects premiums, wins most of the time), while the buyer is like a gambler buying a lottery ticket (low probability, high payout).
Disclaimer: Individual results depend on skill, strategy, and risk management See below.
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I asked, “Do the odds change if the seller sells covered calls?”
Google AI:
The odds mathematically favor the option call seller over the call buyer. This is primarily because options are often slightly overpriced relative to the actual, historical volatility of the underlying stock, and the seller benefits from time decay (theta), meaning the option loses value as the expiration date approaches.
- Call Buyer: Has a lower probability of winning, but potential for large, unlimited profits if the stock rises significantly.
- Call Seller: Has a higher probability of winning (making a small profit) but takes on the risk of potentially unlimited losses if the stock skyrockets (if selling naked).
Do the Odds Change with Covered Calls?
Yes, the odds change significantly in favor of the seller.
Selling a “covered” call—owning the underlying shares while selling the call option—dramatically alters the risk profile compared to selling a “naked” or uncovered call.
- Reduced Risk: If the stock price rises sharply, the seller does not lose unlimited amounts; they simply sell their shares at the strike price, capping their upside.
- Income Generation: The seller keeps the premium, providing a steady income stream, particularly in neutral or slightly bullish markets.
- Improved Probability: Covered calls are a popular income-generating strategy precisely because they offer a high probability of success—the seller wins if the stock stays flat, drops slightly, or rises modestly.
Summary Table
Feature Call Buyer Naked Call Seller Covered Call Seller Probability of Profit Lower Higher Highest Potential Profit Unlimited Limited (Premium) Limited (Premium + Stock Gain) Potential Loss Limited (Premium Paid) Unlimited Substantial (if stock drops) Primary Goal Speculation (Big Move) Income/High Probability Income/Yield Enhancement In summary, while sellers are generally favored due to time decay and overpricing, selling covered calls specifically provides a safer, higher-probability strategy compared to uncovered, or “naked,” call selling.
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What Google AI omits or does not clarify:
Call Seller (Writer): High probability of winning small, consistent amounts (limited reward) but faces high risk (potentially unlimited losses if the stock skyrockets).
If the stock skyrockets and the call is assigned you have to surrender the stock and receive only the much lower strike price. Seller’s strategies.
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Sell only covered calls: While the buyer makes a bundle you only have an opportunity loss. The buyer’s profits are paid for by the market, not out of your pocket.
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Roll the calls up and out: The Delta favors this strategy but degrades the further the current stock price falls from the strike price. Delta goes to zero when the stock price reaches zero.
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My roll strategy: Since volatility is unpredictable I roll up by small steps with near term calls trying to keep the net premium at a small loss.
Debt - margin are the biggest risks. You cannot go broke as long as you can pay your bills, the best reason for selling only covered calls.
The Captain
3 Likes
I’m gonna add:
SELLING options is an INCOME STRATEGY.
If the goal is “get rich”… Then disappointment is likely.
If the goal is wealth building/get rich, a capital gains strategy is the better choice.
Ie LTBH, (or perhaps “buy LEAPS”. Although these carry RISK).
ralph
1 Like
I’m gonna disagree. 
You get rich by earning more than you spend. I started using covered calls as income, so far we agree. What I noticed is that there is no reason not to sell covered calls on one’s LONG TERM HOLD positions. That is what investing lore says but it is wrong. The risk of getting called is very low and by rolling UP and out one also collects capital gains.
Let me ask Googy what it thinks…
It does not agree with me… 
So I asked Googy a different question, “what happens when you exercise a call ahead of expiration?”
Google AI:
Exercising a call option before expiration converts the contract into 100 shares of the underlying stock at the strike price per contract. This action forfeits remaining extrinsic value (time value) and is typically done to capture dividends, gain voting rights, or manage illiquid positions, though selling the contract usually yields more profit. [emphasis added]
Key consequences of early exercise include:
- Forfeiture of Time Value: You lose any premium related to time remaining until expiration, making it generally disadvantageous compared to selling the option.
- Immediate Share Ownership: You immediately become a shareholder at the strike price, which can be advantageous to capture dividends before the ex-dividend date.
- Capital Requirements: You must have enough capital to purchase 100 shares per contract at the strike price.
- Tax Implications: For employee stock options, early exercise may have specific tax benefits or risks.
- Assignment to Seller: The person who sold the call will be assigned (most commonly for American-style options) and must deliver the shares. [Wrong, the seller is chosen at random] Note the Google response below!
Early exercise is generally considered advisable only when the option is deep in-the-money, illiquid (hard to sell), or to capture a dividend that exceeds the remaining time value.
Since it is not “considered advisable to exercise early,” and since the seller is picked at random, and since you roll ahead of expiration by a day or more, the odds of your shares getting called is very low. Do avoid dividend dates when more than likely your shares will be called.
The Captain
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Google AI:
That statement is incorrect, as you noted in your brackets. The seller of a call option is not personally chosen by the buyer, nor is it necessarily the specific person they traded with originally.
When a call option is exercised, the Options Clearing Corporation (OCC) randomly assigns the exercise notice to a member brokerage firm that has clients with short positions in the same option series.
1 Like
Huh.
I wonder why companies like Citadel have such giant businesses making markets in options and are willing to buy your calls?
I guess Citadel didn’t check with AI first when designing their options business.
Either Citadel has unlimited capital to give away, or they’ll bankrupt their options desk soon.
It’s astounding that such a large business could persist for so long when they are always buying calls with such unfavorable odds.
I guess the billionaire owners of companies like Citadel aren’t that bright and don’t even understand option pricing.
Here’s an explanation I prefer (also see the bolded part further below, that’s the punchline);
2 Likes
Google AI:
Citadel Securities acts as a massive market maker—handling ~40% of U.S. retail trades—to profit from the bid-ask spread and volume, not by betting on direction. They buy your calls because they immediately “delta hedge” by selling underlying shares, making money on transaction fees and volatility while reducing risk.
- Market Making Profit Mechanism: As a market maker, Citadel provides liquidity, buying when you sell and selling when you buy. They earn money from the spread (difference between buy/sell price) and in aggregate, they aim to stay “delta neutral,” meaning they profit from trading volume rather than the price direction of the stock.
- The “Retail” Advantage: Retail orders are small, predictable, and generally do not move the market, making them highly profitable for Citadel to fill compared to trading with large, informed institutional investors.
- Payment for Order Flow (PFOF): Citadel pays retail brokerages (like Robinhood) for the right to execute orders, allowing them to capture massive retail options flow, particularly in zero-day-to-expiration (0DTE) contracts.
- Advanced Data and Tech: They use sophisticated algorithms and vast data to price options accurately and manage risk in real-time, allowing them to confidently buy calls from retail traders.
- Hedging the Risk: When they buy your call, they likely sell the underlying stock to another party, capturing fees and reducing their market exposure.
Now you know!
In other words, they are the machinery that runs the casino, the slots, the roulette wheels, etc.
Just to be on the safe side
Pay special attention to: Market Makers vs. Investors:
Google AI:
Yes, Citadel Securities is one of the world’s largest market makers, providing liquidity to retail and institutional clients across equities, options, and fixed income. It is a separate entity from the Citadel LLC hedge fund, holding a dominant position in US equities and options markets.
Key Details About Citadel Securities:
- Market Leadership: It handles a significant percentage of all US retail equity volume and is the largest designated market maker (DMM) on the New York Stock Exchange (NYSE).
- Asset Classes: Beyond stocks, it makes markets in U.S. listed options, Treasuries, and other fixed-income products.
- Function: It provides liquidity to help ensure fair, transparent, and efficient trading for market participants.
Citadel Securities and Citadel LLC are separate legal entities with distinct functions.
What Is a Market Maker?
Google AI:
A market maker is a financial firm or individual (like banks or brokerages) that provides liquidity to securities markets by constantly quoting both a buy (bid) and sell (ask) price. They stand ready to buy or sell, ensuring investors can trade instantly without waiting for a counterparty. They profit from the bid-ask spread.
Key Functions and Characteristics:
- Liquidity Provision: They keep markets running smoothly by ensuring there is always a buyer or seller, which narrows the gap between bid and ask prices.
- The Bid-Ask Spread: Their primary profit mechanism is the spread—buying at a lower price (bid) and selling at a higher price (ask).
- Reducing Volatility: During high market volatility, they absorb excessive demand or supply, helping to stabilize prices.
- Continuous Quoting: They must offer two-sided quotes in all market conditions to maintain an orderly market.
Market Makers vs. Investors:
Unlike typical investors who bet on price direction, market makers are generally market-neutral, aiming to profit from the volume of trades and the spread rather than price appreciation.Examples:
- NASDAQ: Features multiple competing market makers for each stock.
- NYSE: Uses designated market makers (formerly “specialists”) to manage specific securities.
- Currency Exchange: A currency counter at an airport is a simple example, buying and selling currency at set rates.
Market makers are vital for ensuring that financial markets are efficient, allowing investors to buy and sell quickly at fair prices.
The Captain
1 Like
I feel the same way at the roulette table. So long as you pick the right color, the odds are in your favor.
6 Likes
What’s your color picking method?
The Captain
1 Like