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Ric Ingram's verbose argument that selling covered calls
is quivalent to selling a naked put is nonsense in its simplest form.
When one sells a call, covered or otherwise, he obligates himself
to GIVE stock to the call buyer - that's why it's "called".
When one sells a put, naked or otherwise, he obligates himself
to TAKE stock from the put buyer - that's why he's put the stock..
In both cases the options have to be exercised.
Furthermore his concept of parity between puts and call prices
for a given option (strike and expiration) makes for a long story
but misses the reality. Call pricing will differ from put pricing
(for a given option) because the cost of carrying.
This is not worth discussing because the differences are small.
I just want to clear up his mis-perception.
Stan R.
In both transactions
----- Original Message -----
From: "ric ingram" <ringram@xxxxxxxxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Tuesday, February 19, 2002 3:01 AM
Subject: [RT] Selling Covered Calls
> 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
>
>
>
> To unsubscribe from this group, send an email to:
> realtraders-unsubscribe@xxxxxxxxxxxxxxx
>
>
>
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>
>
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