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Wrong on one point. Long stock and short the call is exactly the same as being
short the put. At zero you have lost the same amount being short the put as you
have being long stock and short the call. There is the difference in the call
and put valuation, but that is negligible in a zero to infinity analysis. The
cost of carry is shown in any conversion/reversal analysis. If the stock goes
down you both end up with stock at the same price. Short the put the stock is
delivered with the covered write you still own the stock. at infinity neither
of you would own stock the put would be worthless, so un exercised and the
covered call writer would have his stock called away and also be without stock.
The exact same position. Ira
stansan@xxxxxxxxxxxxx wrote:
> 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
> >
> >
> >
> > Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/
> >
> >
>
>
> To unsubscribe from this group, send an email to:
> realtraders-unsubscribe@xxxxxxxxxxxxxxx
>
>
>
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