|
PureBytes Links
Trading Reference Links
|
Stan,
I am not in favor of an ineconomy of words, but I will take a 'stan'
with verbose
Ric on this one, assuming I have correctly derived his meaning from the
cornicopia of converstation. Assuming one buys a stock and sells an at the
money call OR only sells a put, assuming both are the same month of
expiration, the financial outcome should be roughly the same and so should
the deltas. Those small descrepency that do occur are fodder for the market
makers to arb via the conversion. A typical eample would be XYZ is
trading at 50. The April 50 call is 4 1/2, the April 50 put is 4 1/4. One
could buy the stock, thereby incurring stock transaction costs, carrying
costs, but be compensated by selling the call for 4/12 OR just sell the put
for 4 1/4. In either case, you have about 4 1/4 of protection to the
downside before reaching a breakeven, with a potential maximum loss of 45
3/4. Anything more than 45 3/4 at expiration will be a profit, with a
potential profit if the stock is 50 or higher of approx. 4 1/4. (I am
assuming about 1/4 for the stock transaction and carrying costs). So, as
you hopefully can see, the financial outcome for these two option strategies
is virutually the same. A put is basically a synthetic covered call write.
Convertingly,
Norman
----- Original Message -----
From: <stansan@xxxxxxxxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Tuesday, February 19, 2002 11:35 AM
Subject: Re: [RT] Selling Covered Calls
> 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
>
>
>
> Your use of Yahoo! Groups is subject to http://docs.yahoo.com/info/terms/
>
>
------------------------ Yahoo! Groups Sponsor ---------------------~-->
Get your FREE credit report with a FREE CreditCheck
Monitoring Service trial
http://us.click.yahoo.com/ACHqaB/bQ8CAA/ySSFAA/zMEolB/TM
---------------------------------------------------------------------~->
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/
|