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When was selling covered calls (which is indeed similar to selling puts)
discussed?
I thought Ben was talking about a strategy that was more like a collar,
if I understood it correctly. It seems to me that Ben's strategy is
based on differences between real price movements and the pricing of
options, which is usually done on the basis of probabilistic models.
Whether you believe it works or not, his downside is limited, which
makes it look a lot different than a naked short put -- more like a bull
put spread.
Regards
DanG
ric ingram wrote:
>
> Hi,
>
> recently, related to QQQ, there has been talk of covered call selling.
>
> Selling covered calls is a popular strategy, often recommended to
> conservative investors in stocks.
>
> Like all strategies there is a time, place, and appropriate audience.
>
> If you have studied options you will know about put-call parity. This is
> the equivalence equation that helps keep the prices of puts and calls at
> the same strike at the same maturity strongly tied with each other -
> otherwise arbitrageurs, looking for a risk free (but not capital free)
> profit, enter the market to help make the prices come in line within the
> limits of trading expenses.
>
> The equation that relates the prices of a put (P) and a call (C), at the
> same strike and the same maturity to their underlying security (U) is:
>
> U = C - P
>
> Reassembled this is U - C = -P
>
> So holders of the underlying who sell covered calls are performing the
> equivalent of selling a naked put.
>
> Now most conservative investors would run a mile (rightly or wrongly) if
> you suggested they sell naked puts, but that is what they are doing when
> they sell covered calls.
>
> It is truly amazing how greed can get some people to initiate positions
> that if they understood their fear would stop them doing.
>
> But some people have a real perception problem - and do not know it.
>
> It is only reasonable to point out that given that you intend to hold the
> underlying, selling a covered call actually reduces your exposure to a big
> fall. So if you were going to hold the underlying anyway, selling covered
> calls can be considered a conservative strategy.
>
> However if you do not hold the underlying or do hold it but do not intend
> to keep it, buying the underlying and selling a covered call is the same as
> selling a naked put.
>
> Paradoxically, selling naked puts is actually lower risk than holding the
> underlying if you allocate the same capital as you would have done for
> holding the underlying.
>
> But rationality is rarely a bedfellow with fear or greed.
>
> Unconditionally yours, Ric.
> www.traderscalm.com
>
>
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>
>
>
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