Your example is a little off from real life. Let me just show you my last few trades with qqqq.
In September I had some options I sold for AMD get called so I had some extra money to throw at qqqq. I bought at 40.11 then immediately sold October $41 options for $0.60. QQQQ immediately took a noise dive and I bought them back for $0.30 and then resold them later for another $.60. However lets just pretend I didn't buy them back and resell them because most people, including myself, shouldn't play that game to much. So lets pretend I didn't buy them back and resell them. So here I'm sitting with a purchase at $40.11, and I got back $0.60. Lets talk about each of the three scenerios (it closes above 41, below 41, or at 41)
Below $41.00: I own QQQQ and have a cost basis of $39.50. If the stock is at $40.11 then I'll sell the Nov $41 calls for about $0.60, making the 1.5% again. If it's lower then $39.50 I am starting to lose money.
At $41.00: I get called and don't own anything. However I could buy the shares right back for what they got called for and still have the same number of shares plus the $.60/share cash. That's if the stock rises 2.2% in one month.
Above $41.00: There are actually two scenerios here. A) it's below $41.60. I make money since I can use the $41/share I got for being called and $.60/share option to repurchase the thing if I want and still have cash. B) it's above $41.60. Which means it went up a over 3.7% in a month. That's dang good and I would have netted 3.7% that month. I would guess, and yes it is a guess though based on past history, that a rise that high that fast would have a small correction. I might be able to buy it back for under $41.60 during that correction. If not then who cares? I missed out on more gain, but I can restart the whole process. And since I should have been doing this for a few months prior (as I am with most of my qqqq holdings) I have stored up a few months of the $.50 to $.70 premiums so I can easily buy back more shares then I was called in on.
Anyway your example shows what happens if you sell the wrong calls. I always try to sell calls that are somewhere around 1.5 to 2.5% out of money. Which I did about a week ago. I got $.60.
Anon, I'm not sure I want to 'win' this argument. I do want people to understand what I am thinking, and thus in doing so can get others opinions and insights that would probably either convince me I'm wrong, move the theory closer to actual fact, or prove that I deserve the nobel prize for something besides really cool virtual reality rooms where I build vehicles.
I do expect the S&P500 to make 9-10% a year over 20 years. I am the first to admit I could be wrong. But it's something I feel safe and secure with just like the real estate guy would (by the way I just bought 1 acre on a lake up in northern MI ... pretty geeked about that). I think everyone needs to come up with what they think will happen, that's the whole idea of investing.
Mark, If I'm able to get you to understand me and my theory then that is all I truly want to do. At the point where I believe you do understand me, that's where I would really love for you to throw me any curves and really try to beat down the theory or show me where somethings could be improved on or how to look at it in a different light. I'm a computer engineer that is cursed to see numbers in everything from the angle in the crack in the side walk to how much more milk I'm going to have to drink to maintain my calcium because of this can of pop I just drank. I see numbers in everything, so this is one of my attempts at letting it make me some money. So far so good. Help me shoot it up or make it better ... once you understand my language that is (which you should get kudos for if you can ).