How This Economist Cares for a Baby

Zachary Bartsch2 Comments

I have four children, and all them were or are babies. As an economist, I know that becoming more productive includes contributions to labor, capital, and technology. Caring for and pacifying babies is no different. Here are some of my methods for pacifying and employing babies who are 4-18 months old.

Own a pacifier. You don’t need to use it or even force it into your baby’s mouth. But just have it around. Paul Romer said that we learn and innovate by interacting with capital. So, let’s get the capital.

Employ your baby’s labor. Children as small as 2 or 3 can go get the eggs from the hen house. But what about a smaller baby? Of course we need to stimulate, feed, water, change, and rest the baby. But sometimes, you just need them to be quiet. What to do? Babies respond to Pavlovian stimulus at a very early age. If they’re crying or even just somewhat bored, then place the pacifier in their hand and say, in a very low but normal voice, ‘pacifier’. Babies will instinctively put the pacifier in their mouth. If you have it clipped on, then eventually, they’ll be able to find it when they need it. Developing physical human capital takes work experience and time. I always insist that my older children place the pacifier in the baby’s hand rather than the baby’s mouth. Greater human capital will yield productivity gains.

There came a point when my baby would awaken at night. I wouldn’t even get out of bed. I’d just calmly, and dispassionately say ‘pacifier’. And our baby would pop the pacifier in their own mouth. Employ your baby’s labor. Innovation happens when you interact with capital.

In the same vein, I’d balance the baby bottle on my child’s front side, and place their hands on it. Next thing I knew, my baby was holding their own bottle earlier than the internet said that I should expect them to. Those little hands aren’t useless. They’re low marginal product labor just waiting to be employed. Given that home production is a team effort and labors have interaction effects, that small marginal product for the baby frees your labor to have a larger marginal product for the household. Take advantage of interaction effects, specialization, and comparative advantage.

How do you produce sleep in a baby? Let’s examine the production function. It typically includes: warmth, a clean diaper, darkness, a full belly, maybe some motion, and a lack of disruptive noise. Once the baby is asleep, you really only need the warmth, darkness, and peaceful noise. Leverage your capital to make yourself more productive. Capital may not be able to replace you in helping your baby fall asleep. But it can replace you to help keep them asleep. Repurpose your current stock of capital. If only there was a warm, dark, white noise chamber in your house already. There is. It’s called a bathroom. Get your infant to fall asleep, then put them in the dark bathroom with the fan on. Now you can grade your papers, clean the house, or write your articles.

Addendum on diaper changing:

When it comes to changing a diaper, you should act like you have a low discount rate. That is, you should bear the cost of preparing a changing space so that your future self is thankful. This means preparing the changing pad, opening the new diaper, unfolding the wipes, preparing for diaper disposal, and preparing any new clothes. This makes the diaper changing process much easier and mitigates stochastic costs like leaks, mid-change accidents, etc. Further, your MPL is lower when you have to mind a baby who’s on an elevated surface. Employ your labor when it’s more productive – before you lay them down.

Do you have a baby who fights or cries during diaper changes? Take a hint from the Fed and engage in forward guidance. Did you know that if you blow in a baby’s face, that they instinctively close their eyes and mouth and stop flailing? Early on this can act as a reset and interrupt crying. As a baby gets older, they’ll learn to anticipate the blown air. But only if you build your reputation.

When my 12 month old would start to fight, I’d audibly inhale. My baby would immediately stop fighting and clothes her eyes and mouth, and stop flailing in preparation of me blowing in her face. That’s called forward guidance. Building a reputation of action means that signaling action is often just as good as the act itself. But be careful, if you always blow in their face, they grow accustomed to it due to expectations augmented responses. So, I introduce stochastic bluffs wherein I audibly inhale, but then neglect to blow in their face. Stimulus only works repeatedly if you can violate their expectations.

Stay tuned for more economist parenting tips.

Pistol Squats Complete the Home Workout

James Bailey2 Comments

A good strength workout includes a push, a pull, and legs. When I can get to the gym I like to alternate bench press and incline press for the push; rows and pulldowns for the pull; and squats and deadlifts for the legs. But with a baby to take care of at home, its been hard to find time for the gym. Between driving, waiting for equipment, and the actual lifts, the gym takes an hour. Doing a similar workout at home can take just 10 minutes, and has the advantage that you can watch a baby while doing it.

But the big challenge with home workouts was finding a good leg exercise. Pushes are easy: just do pushups. Pulls are pretty easy: just buy a $15 pullup bar to hang over a door. But how to do a good leg workout without costly barbells and plates that take up lots of space? Enter the pistol squat.

The idea is simply to start from a stand and lower yourself down almost to the ground on a single leg, then come back up on one leg, with the other leg out front for balance:

Source: Snapshot from this video, which shows how to do the standard pistol plus many variations

I find this to be about as difficult as doing a traditional two-legged barbell squat with 1x bodyweight on the bar. The traditional squat has two legs lifting 2x bodyweight (your body itself, plus 1x bodyweight on the bar); the pistol squat has one leg lifting 1x bodyweight (just your body itself), which is about equal. This was perfect for me because I was doing about 3 sets of 5 reps of squats with 1x bodyweight on the bar, so I just do the same number of pistol squats. But what if you’re not exactly at that weight?

Going lighter is easy– just put one hand on something sturdy nearby like a table and lean on it until it takes enough of your weight that you can do the squat. This helps with balance too if that is an issue. Going heavier is harder, but you could carry something heavy in your hands, turn the rise into more of an explosive jump, or just do more reps.

I’d still rather be at the gym, but the complete home workout seems like a good application of the Pareto Principle– you get most of the benefits of the gym while paying only a small fraction of its time and money costs.

Alabama’s Homicide Rate is More than Double New York City

Jeremy Horpedahl2 Comments

A lot of people think New York City is an especially high-crime city. Including some US Senators. Here’s senior Senator from Alabama:

Ignore the weird obsession with Biden’s ice cream habit. The Senator is concerned that NYC is not safe.

But what’s the reality? Here’s a map showing the homicide rate in each state, and its relative position to NYC (data is from the CDC for 2022, the most recent complete year available right now).

The light-colored states have a lower homicide rate than NYC (5.2 deaths per 100,000). There’s 18 of those states. But most states have higher homicide rates than NYC. Some are a lot higher, even triple NYC in a few states (colored purple). Alabama’s homicide rate of 13.9 deaths per 100,000 people is about 2.5 times as high as New York City.

But perhaps the homicide rates in these states are being driven by high homicide rates in cities in those states? Comparing a city to a state is perhaps a little strange to do, but I also often hear this retort: well, it’s those cities, especially “Democrat-controlled” cities, that are driving the high homicide rate in Alabama and elsewhere. And while this is true to a certain extent, comparing rural counties to New York City doesn’t make Alabama and the South look much better:

For this map I combined 2021 and 2022 data, because the CDC doesn’t report very small numbers (usually under 10 deaths), so grouping two years is needed to get more data. Even so, there are still a handful of states that don’t have enough homicides for CDC to report them over that two-year period, and they are shown in gray on the map (as well as states that have no rural counties: Delaware, Rhode Island, and New Jersey).

Notice that even focusing on just the rural counties, there are almost 20 states with higher murder rates than New York City. Again, some are double or even triple. Rural Alabama, at 11 deaths per 100,000 people, is exactly double NYC. Notably, the entirety of the rural South is higher than NYC.

If this is all true, why might New York City feel less safe? There are a number of possible explanations, but I’ll offer a few. First, homicide isn’t the only kind of crime. While it does correlate with other crimes, it’s not a 1:1 relationship, so it’s likely that some places with higher homicide rates than NYC have lower levels of assault, rape, or property crimes. These are even more challenging to compare across jurisdictions, but it’s a possible explanation. Related, NYC is a relatively safe big city! Other big cities wouldn’t compare as favorably to Alabama. But folks just seem to love NYC as a punching bag.

The other explanation is just the sheer number of people, and therefore homicides. According to the CDC, NYC had 434 homicides in 2022, that’s an average of more than one per day. You could literally turn on the news every single day and hear about a murder, and perhaps you had even been in the neighborhood where it happened recently. Contrast rural Alabama, which had 65 homicides in 2022. That’s only about one per week. And it might be happening in a completely different part of the state from you, so you either don’t hear about it or think “that’s somewhere else.”

But rural Alabama only has about 600,000 people. NYC has fourteen times as many people. So if we are trying to answer the question “What are the odds that a random person is murdered in a given year?”, we need to take population into account. That’s the logic of reporting homicide rates. Indeed it may feel like NYC is less safe, and that’s a natural human reaction. But that’s why the data is so important, to give us a sense of proportion.

Most Effective Over the Counter Cold Remedies

Scott BuchananLeave a comment

Cold symptoms are personally unpleasant, and also have economic aspects. In 2011, Americans directly spent some $40 billion on cold medicines, and the societal costs of workers and students staying home are much greater.

Having dealt with one or two colds a year for quite a few decades, I have
significant experience with cold remedies. Also, being a habitual researcher, I have nosed around the internet looking at various studies of the effectiveness of medications.

The biggest problem I have with colds is the nasal drippage at night. In the daytime, I can just blow my nose, but at night this can keep me from sleeping, and also leads to nasty coughing and even bronchial infection if the stuff goes down into my lungs.


There are various so-called first-generation antihistamines out there. They all have some sedative affects. Second-generation antihistamines (e.g. fexofenadine, loratadine, and cetirizine) have fewer sedating qualities, since they do less crossing of the blood-brain barrier, but they tend to be only effective for allergies and less effective for colds.


The best antihistamine for colds which I have found, which seems to be confirmed on the internet, is chlorpheniramine maleate. This was the key ingredient in classic Coricidin, and now appears in Coricidin HPB. HPB stands for high blood pressure. It seems to be always accompanied with some acetaminophen (Tylenol).

(Side comment: the internet seems to say that in general antihistamines are not a problem for people with high blood pressure. Decongestants are. I guess the manufacturer turned the lack of a decongestant in this formulation into a virtue, by calling it “safe for high blood pressure.”)

Coricidin HPB exists in many different incarnations on drugstore shelves. The one I go for is the Cold and Flu package, see below. It just has the chlorpheniramine maleate plus acetaminophen:

Most of the other variants have the word “cough” in the title, such as “Cough and Cold,” and contain dextromethorphan cough suppressant. I find the combination of the dextromethorphan plus the antihistamine to be extremely soporific. In my medicine cabinet I label them “zombie pills, since they leave me feeling torpid even 24 hours after taking them. The plain antihistamine version (Cold and Flu) also slows me down, but not nearly as much as the cough suppressant version.

I have also found generic versions (e.g. CVS brand) of chlorpheniramine maleate. However, less than half the pharmacies I check have this stuff on their shelves, for some reason. I guess it is not as heavily promoted as the Vicks NyQuil, which contains the heavily sedating doxylamine succinate (active ingredient in Unisom sleep aid) as the antihistamine component.

I recently ran across an article by Parkview Health which happens to come to the same conclusions I have. I will share their recommendations here in italics, with a little further commentary of my own. On antihistamines for runny nose:


In patients older than 12 years of age: Nyquil™ (doxylamine succinate), Tavist (clemastine fumarate), chlorpheniramine maleate or Benadryl® (diphenhydramine) may help relieve symptoms, although these may cause sleepiness. Chlorpheniramine maleate is the least sedating of the products listed above.

For Nasal Congestion:

The best oral medication would be Sudafed® (psudoephedrine) [sic], which is a medication behind the counter in the pharmacy. There is a medication that is similar and available over-the-counter, Sudafed PE® (phenylephrine), but it’s not nearly as effective as plain Sudafed®. These medications have precautions in some disease states so it is best to consult your physician before treating your nasal congestion.

The best nasal spray medication is Afrin® (oxymetazoline) and while this medication is very effective. It should only be used for 3 days due to the potential side effect of rebound congestion.

Nearly all the meds on the drugstore shelves for stuffy nose use phenylephrine, which is known to be essentially useless. Go figure. Anyway, go for the good stuff, the pseudoephedrine. I use the 12-hour slow-release formulation, keeps me going all day. This med does jazz up your nervous system, so some folks may find the racing brain to be unpleasant. Truck drivers use it to stay awake at night, but for the rest of us, don’t take this at bedtime.  I take the antihistamine at night (half hour before bedtime, and typically once in the middle of the night, since it only lasts about four hours), and the decongestant in the morning.

If I can’t afford to be slow-brained the next day, or if I am at peak nasal congestion, I might use the nasal spray at night once or twice, but I know from experience that using it too much leads to permanent stuffiness.

Pseudoephedrine can be used in the manufacture of methamphetamine, so you can’t just load up your shopping cart with boxes of it. In the U.S., you typically have to go to the pharmacist’s counter, and they dole all out maybe two boxes at a time, noting your driver’s license, and entering it into some national database.

I’ll let the good folks at Parkview Health offer the closing wisdom here on cold and flu meds:

Cough:

The best way to address cough is to assess what kind of cough it is. When you cough is it dry and non-productive? Or is it wet and mucus exits with the cough?

If the cough is dry and non-productive:

  • Utilize Delsym® (dextromethorphan)

If the cough is wet and produces mucus:

  • Drink water to make the mucus thinner
  • Utilize Mucinex® (guaifenesin)

Fever/Sore throat:
The best medication for fever and/or sore throat is plain Tylenol® (acetaminophen) or NSAIDs such as Motrin® (ibuprofen).

What medications are best to treat the symptoms of the common cold in children?
Many medications that are used in the common cold for adults should not be used in children because there have been few trials supporting their use in infants and children. Therefore, the best treatment is Children’s Tylenol® (acetaminophen) or Children’s Motrin® (ibuprofen) for fever or uncomfortable symptoms due to the common cold.

Other than the medications listed, the best way to help your infant or child get rid of the common cold is drinking an adequate amount of fluids. If further help or direction is needed, contact your physician.

What medication(s) are best to treat the flu?
Unfortunately, the flu is much harder to treat over-the-counter, as there aren’t medications to really treat this viral infection. The best measures to take are to get plenty of rest, drink enough fluids and utilize Tylenol® (acetaminophen) for fever.

There are medications that can be prescribed by your physician to help shorten the duration of the flu although studies have shown the medications shorten the flu by only a day.

The best way to prevent the flu by getting the flu shot

Other Types of Cold Remedies

The above discussion covered plain vanilla, non-prescription (over the counter) medications. There are other more exotic and expensive meds to be had by prescription, as well as a plethora of folk remedies. Here is a link to about a dozen such nostrums, such as garlic and cognac, vinegar and cayenne pepper, and sauerkraut.

How to destroy or save a discipline

mdmakowsky3 Comments

Alex Burns recapped a conference session about the market for PhD students in History. It was, predictably, rather despondent as is the nature of the job market for all graduate students in history, but doubly so for those outside the absolutely most elite 3 to 5 schools. The whole thread tells the story of graduate education in history, and the broader humanities, with sincerity and empathy.

Now, if I were a respectable economist, I would note that discussed plans to increase the supply of graduate student labor in a market with already paper thin demand is most certainly not the answer. Economists rarely pass up the opportunity to roll their eyes at any academic failing to understand supply and demand, but fortunately Christopher Jones (a proper historian) already made the appropriate observation:

What caught my eye, however, was the noted recommendation that faculty stop identifying scholarship in their field as a viable career altogether:

This makes my blood run cold for a number of reasons. First, its a trap whose bait is appealing to those students who are simultaneously the most earnest and most insecure. Unsure of what life will be like after college but know in your heart that you loved your classes in rhetoric or 16th century literature? Then why not make the noble decision to forsake the material world for a life of the mind? That’s exactly the kind of trap that makes for the pompous 23-year olds who turn into angry and despondent 30 year olds.

Perhaps worse, however, is the forsaking of an entire discipline that once held the mantle of profession and might now resign itselft to the standing of a hobby. I’m a STEM-y, arrogant economist who consumes very nearly no pre-19th century literature but that doesn’t mean I don’t think the deepest understanding of the foundations of a culture, any culture, doesn’t have profound insight to offer future generations. There is value there, the kind that might even qualify as a public good, whose provision we might want to collectively support, if we so chose.

It’s especially frustrating, however, because I can’t help but think the answer is right in front of them. It just happens to be nearly the inverse of the first suggested policy. History and the humanities need to reduce the supply of graduate students. That’s all there is to it. Yes, research and teaching will be more slower and more arduous without as many graduate assistants. It’s a tough break, but it sure as hell seems a more modest price to pay than the abandonment of scholarly training as something that leads to a viable career. I’d also like to very much hope that it would ease the conscience of faculty taking on graduate students as assistants, then thesis advisees, knowing that 5 years of laborious apprenticeship isn’t destined from the beginning to end in tears. You’ll have fewer graduate students, but hey, at least now you’ll be able to look them in the eye.

There’s a term in urban development: shrinking to greatness. A city can in fact shrink in population and still come out the other side viable, even potentially stronger than ever. That’s the story of Pittsburgh. Embrace what you are, not what you used to be or wished you were. There are a lot of disciplines and subdiscplines that are going to destroy themselves trying to become the STEM fields they wished they were or the recreate past golden ages of dubious veracity. But there will be some, across fields or within single universities, who will recharacterize themselves as custodians and curators of scholarship whose demand may have shrunken, at least for the moment, but whose contributions can carry forward. If that means at a slower pace or smaller scale, so be it. Better to embrace what you are than recruit the naive as kindling for a bonfire lit by arrogance and denial.

Books the 8-year-old likes

Joy Buchanan2 Comments

One of my personal interests is encouraging my kids to read. This is a list of books that my 8-year-old son really likes.

If you count Calvin and Hobbes as reading (it’s a comic book), then it is his first love and continues to be a favorite.  

Calvin and Hobbes (Volume 1) Paperback

The Calvin and Hobbes Lazy Sunday Book (Volume 4)

These next two are STEM-friendly goofy books with lots of pictures to break up the text. Currently, if he has to do independent reading time, these are first choices.

Big Bangs and Black Holes: A Graphic Novel Guide to the Universe

The 39-Story Treehouse

These chapter books are prime read-aloud choices for us to read to him that hold his interest.

The Phantom Tollbooth

The Silver Chair

Ender’s Game – Still incredible. Still feels futuristic, although the emphasis on “smart desks” instead of “smart phones” is funny. It was published in 1985.

The Great Brain

Bonus, for 5-year-olds:

The 5-year-old picked out “Woodpecker Wants a Waffle” at our local library and has been delighted by it. It’s a funny picture book that holds up to re-reads. See if your library has it. Public libraries are especially great for 5-year-olds who are ready to explore beyond the Dr. Suess classics at home but also not able to commit to any books worth buying.

Wanna Teach Economics?

Zachary Bartsch1 Comment

At Ave Maria University, we have an open economics faculty position. Indeed, it’s late in the job market and we haven’t settled a match. That’s what accounts for my late post. I interviewed someone today when I otherwise would have been grading. So, I spent my evening writing feedback on papers (pleading for greater concision).

We are a small department at a Catholic liberal arts school. When staffed, we employ 3 full time Econ faculty plus 1 or 2 adjuncts. We’re primarily a teaching university, teaching 3-class loads each semester. The students are great people. They have better moral fiber than I did at their age and the Econ majors tend to be smarter and more capable than I was at their age.

The university is located in Ave Maria, Florida which is a small town near Naples, the very wealthy destination of snowbirds and retirees. Most faculty live near the university, send their kids to the nearby private school, and attend the same masses. There is a lot of community here.

We’re happy to take economists of almost any specialization. A focus on micro or stats or data analysis would be a plus. The link to apply is below. I’d be thrilled to learn that this is how we met.

https://workforcenow.adp.com/mascsr/default/mdf/recruitment/recruitment.html?cid=70cb71c1-96f8-4956-8cce-ce625b0b2943&ccId=19000101_000001&type=JS&lang=en_US&jobId=466997

The Best Personal Finance Books

James Bailey5 Comments

Last week Scott offered a very negative review of one popular personal finance book, Rich Dad Poor Dad. My own take on the book is less negative, but I still wouldn’t recommend it to most people. That still leaves the question of which personal finance books are worthwhile. I gave my answer back in 2020 in a post on my personal blog. You can read the full reviews there, but I’ll give my short answers here:

I Will Teach You to Be Rich

Despite the title, the book is really about the basics of how to get out of debt, save for retirement, and manage credit. The material is stuff most people will figure out on their own by their 30’s or 40’s, but it’s a nice presentation all in one place and can save people from learning lessons the hard way. Perfect for a college student, someone at their first real job, or someone older who feels like they missed the memo on how all this works. His big idea is that once you set and meet good savings goals, you don’t need to feel guilty about the things you do spend money on.

The Millionaire Next Door

This book is built around surveying millionaires and finding the commonalities in what they did to get wealthy. The core idea is that Americans with millions saved tend to have moderately high incomes but very high savings rates. Even someone with a normal income can become a millionaire- income is different from wealth. The key is to live frugally and let the compound returns on your savings work for you. The original version of the book is inspiring, but has out of date numbers; the author’s daughter recently updated it (The Next Millionaire Next Door) with more current numbers.

There are many more books about how to invest, but for broad takes on personal finance overall these are the best two I have found, and the ones I recommend to students. Still interested to hear your thoughts on more recommendations.

Food Inflation in the G7 and Russia

Jeremy Horpedahl1 Comment

Food prices are up a lot in the past few years. I’ve written about this several times in the past few months. In the US, we’ve seen grocery prices go up 20% on average in just 3 years. That’s much higher than we are used to: in the decade before the pandemic, the average 3-year increase was just 4%. In fact, the 3-year increase was negative for much of 2017 and 2018. To find increases this big, you have to go back to the late 1970s and early 1980s (when sometimes the 3-year grocery inflation rate was almost 50%).

But if it’s any consolation, this is not a problem that is unique to the US: food prices are up around the globe. That’s a relevant insight when we come to a recent viral video from Tucker Carlson’s visit to a Russian grocery store. Carlson says that the inflation and cost of groceries will “radicalize you against our leaders.”

So what has food price inflation looked like in Russia, the US, and the other G7 countries? (What used to be called the G8, until Russia invaded Crimea in 2014.) Here’s the chart:

Cumulatively since January 2021, when our current “leaders” came into power in the US, food prices are up 20% in the US, as I said above. But notice that this is on the low end for this group of countries. Japan, with consistently low inflation and occasionally deflation over the past few decades, has been the lowest over this timeframe (though even in Japan, food prices are up about 7 percent in the past year).

But notice who is the highest: Russia, where grocery prices are up 32% in the past 3 years. Certainly, their invasion of Ukraine and the resulting global sanctions plays a role in this, but even if we look at early 2022, the cumulative 15% food inflation was much higher than any G7 country.

So blaming our leaders for rampant inflation is probably not a good idea, especially if you are trying to portray Russia in a positive light.

Perhaps the more charitable interpretation of Tucker Carlson is that the nominal price of groceries is lower, rather than the rate of inflation (even though he does mention inflation in the video). The basket of food they purchase in the video comes out to the equivalent of about $100 at current exchange rates. Everyone on his crew guessed it would be around $400.

I can’t say whether their guess of $400 was accurate, but it would not be totally surprising if the prices of non-tradable goods were lower. This is what would expect in a country with lower wages. While we normally think of services as non-tradable, it’s also reasonable to assume that a lot of fresh food, such as produce, bread, and dairy, is also non-tradable (at least not without high transaction costs).

Carlson’s claim that people “literally can’t buy the groceries they want” is a much more apt statement of the state of affairs in Russia (and other poor countries) than it is in the US and Western Europe.

We can see this in a few ways. For example, here’s a chart showing the percent of consumer spending that goes to groceries:

The average Russian allocates about 30% of their spending to groceries, similar to the Dominican Republic. And this data is from 2021, just before the massive spike in food prices in Russia. Meanwhile, the US is by far the lowest, at just under 7%. The UK, Canada, and Switzerland are the closest to the US, but they are in the 9-10% range. Food in the US is cheap.

And those high average levels from Russia obscure a wide-ranging distribution of food insecurity. In a story from Russian state-owned news agency TASS, they report that over 60% of Russians spend at least half of their monthly income on food. Even Putin is publicly acknowledging that inflation is a problem.

The food inflation we’ve experienced in the US has been bad, the worst in a generation. But it’s not exactly clear that our “leaders” are to blame. And it’s also pretty clear that it’s much worse in the rest of the world, especially in Russia.

Stock Options Tutorial 3. Selling Options to Generate Extra Income

Scott Buchanan3 Comments

In the first installment of this series on stock options, I focused on buying options, as a means to economically participate in the movement of a stock price up or down. If you guess correctly that say Apple stock will go up by 10% in the next two months, you can make much more money with less capital at risk by buying a call option than by buying Apple stock itself. Or if you guess correctly that Apple stock will go down by 10% in the next two months, you can make more money, with less risk, by buying a put option on Apple, then by selling the stock short.

In part two of the series, I discussed how options are priced, noting the difference between intrinsic value, and the time-dependent extrinsic value.

Here in part three, I will discuss the merits of selling, rather than buying options. This is the way I usually employ them, and this is what I would suggest to others who want to dip their toes in this pond.

Just to revisit a point made in the first article, I see two distinct approaches to trading options. Professional option traders typically make hundreds of smallish trades a year, with the expectation that most of them will lose some money, but that some will make big money. A key to success here is limiting the size of the losses on your losing trades. It helps to have nerves of steel. Some people have the temperament to enjoy this process, but I do not.

Selling Out of the Money Calls

Instead if spending my days hunched over a screen managing lots of trades, I would rather set up a few trades which may run over the course of 6 to 12 months, where I am fairly OK with any possible outcome from the trades. A typical example is if I bought a stock at say $100 a share, and it has gone up to $110 a share, and I will be OK with getting $120 a share for it; in this case I might sell a six-month call option on it for five dollars, at a strike price of $115. The strike price here is $5 “out of the money”, i.e., $5 above the current market price.

There are basically two possible outcomes here. If the price of the stock goes above $115, the person who bought the call option will likely exercise it and force me to sell him or her the stock for a price of $115. Between that, and the five dollars I got for selling the option period, I will have my total take of $120.

On the other hand, if the stock price languishes below $115, I will get to keep the stock, plus the five dollars I got for selling the option. That is not a ton of money, but it is 4.3% of $115. If at the end of the first six-month period I turned around and sold another, similar six-month call option which had the same outcome, now I have squeezed an 8.6% income out of holding the stock. If the stock itself pays say a 4% dividend, now I am making 12.6% a year. Considering the broader stock market only goes up an average of around 10% a year, this is pretty good money.

At this point, you should be asking yourself, if making money selling options is so easy, I have I heard of this before? What’s the catch?

The big catch is that by selling this call, I have forfeited the chance to participate in any further upside of the stock price, beyond my $120 ($155 + $5). If at the end of six months, the stock has soared to $140 a share, but I must sell it for a net take of $120, I am relatively worse off by selling the call. I have still made some money ($20) versus my original purchase price. However, if I had simply held the stock without selling a call option, I would have been ahead by $40 instead of $20. And now if I want to stay in the game with this stock, I have to turn around and buy it back for $140. This decision can involve irksome soul-searching and regrets.

There are two techniques are used to reduce these potential regrets. One is to only sell calls on say half of my holdings of a particular stock. That way, if the stock rockets up, I have the consolation of making the full profit on half my shares.


The other technique is to try to identify stocks that trade in a range. For instance, the price of oil tends to load up and down between about seven day and $90 a barrel, barring some geopolitical upset. and the price of major oil companies, like Chevron or ExxonMobil, likewise trade up and down within a certain range. If you sell calls on these companies when they are near the top of their range, it is less likely that the share price will exceed the strike price of your option. Or, if it does, and you have to sell your shares, there is a good chance that if you just wait a few months, you will be able to buy them back cheaper. On the other hand, a stock like Microsoft tends to just go up and up and up, so it would not be a good target for selling calls.

Some Personal Examples

From memory, I will recount two cases from my own trading, with the two different outcomes noted above. ExxonMobil stock has been largely priced between $95 and $115 per share, depending mainly on the price of oil. In early 2024, with the price of XOM around 117, I sold a call contract with a strike price of 120 and an expiration date in January, 2024. I think I got around $9 per share for selling this option. The next twelve months went by, and the price of XOM never got above 120, so nobody exercised this call contract against me, and so I simply kept the $9, and kept my XOM shares. Since each contract covers 100 shares, I pocketed $9 x 100= $900 from this exercise, covering 100 shares (approx. $12,000 worth) of XOM stock.

That was the good, here is a not so good: I bought some ARES (Ares Management Corporation) around February 2023 for (I think) around $80/share. For the next few months, the price wobbled between $75 and $90, while the broader S&P 500 stock index (lead by the big tech stocks) was rising smartly. I lost faith in ARES as a growth stock, but decided to at least squeeze some income out of it by selling a call option for about $10 at a strike price of $110 and a distant expiration of Dec 2024.

What then happened is ARES has taken off like a rocket, sitting today at $132/share. If it keeps up like this, it may be well over $150 by December, 2024. I will likely have to sell my 100 shares for $110 (the strike price), so I will get a total of $110 + $10 = $120 for my shares. That is far less than the current market value of these shares. I am not crying, though, since I have some more ARES shares that I did not sell calls on. Also, getting $120 for the shares I bought for $80 is OK with me. There is a saying on Wall Street about being too greedy, “Bulls make money, bears make money, pigs get slaughtered.”

Selling Puts

Briefly, selling out-of-the money puts is like selling calls, on the buy-side instead of the sell-side. It is a way to generate a little income, while garnering an advantageous purchase price, if things go as hoped. In my ARES example above, suppose my 100 shares get called away from me, when the market price is $150. I have various choices at that point. I could simply by a fresh 100 shares at $150, or I could get onto other investments. Or, if I were not happy about paying $150, I might sell a $140 put for say $6 per share. I would have to be OK with either of two outcomes: (1) either the price drops below $140 and the buyer of my put option forces me to buy it at $140 (in which case I need to have $140 x 100= $14,000 in cash available) , though net the stock will only cost me $140 – $6 = $134 ; or (2) the price stays above $140 and I simply pocket the $6 option premium.  And I have to be willing to live with the regret if ARES goes on to $180, in which case it would have been better to have simply bought shares at $150 instead of dinking around with options.

So, there is no one-size-fits-all approach. Again, I prefer to sell puts on companies that more trade in a range. For instance, gold tends to meander up and down – I have thought about it, but never got around to selling puts on gold companies at lows, and calls when they are high.

In Summary

I find judicious selling of calls and puts is a fairly tame way to make a little extra income on stocks. Also, it forces me to set some price targets for buying and selling. I have horrible selling discipline otherwise – I have a hard time making up my mind to buy a stock, but once I do, and once it goes up, I fall in love with it and don’t want to sell it (partly because lazy me doesn’t want to do the work to find a substitute). Selling calls is one way to force myself to set “OK” price targets for letting a stock go.

All that said, selling calls does forfeit participation in the full upside of a stock, and is probably not a good approach in general for growth-oriented tech stocks. Likewise, selling puts, instead of outright buying a stock, may lead to regrets if the stock price goes way up and gets away from you.

As usual, this discussion does not constitute advice to buy or sell any security.