The difference in expectation is reflected in respective prices. No systematic arb there. The occasional mis-pricings are in pennies at mid -- not playable for anyone crossing the spread.
Buy / Write
- Thread starter viruscore1
- Start date
No difference in expectation. The difference is in path dependency. If the OPs plan hits where he captures the dividend AND gets called away he will do better. If instead he gets called away before the dividend he does worse.
Looking at the bid prices: he can make 1.95 in the put vs making .85 call + .65 stock + .67 div = 2.17.
However if he isn't able to capture the div (optiminal early exercise) then he does about 40 cents worse than the put.
The short put vs BW doesn't have a chance on the dividend or capital gains unless you're assigned. But you knew that right. Currently the trade has already reach approximately 50% of it's potential profit.
The put trades at a premium to the call to account for the dividend expectation and both the call and the put will be subject to taxable events. But you knew that right....
I don't mind paying my tax share.
Attachments
We will know in a few weeks how this trade unfolds. A simple B/W sure makes an interesting discussion.
That's why I started the sentence with "if"....
New option traders should understand that option market makers are some of the sharpest guys around. They do not misprice calls vs puts.
As to the " different scenarios", do a Monte Carlo analysis and again, you will find they are fairly priced.
The buy/write is one of the most conservative option trades available to consumer investors. Many retirees use this simple strategy on their long holdings to generate and supplement their monthly income. Don't worry if your b/w is assigned, a short put can be used to get it back and make some more premium. Risk is taken off the table at the same time if your short put strike price is below your call assigned price.
Last edited:
That's why I started the sentence with "if"....
New option traders should understand that option market makers are some of the sharpest guys around. They do not misprice calls vs puts.
As to the " different scenarios", do a Monte Carlo analysis and again, you will find they are fairly priced.
Thanks for the compliment. I was a market maker for several years.
In most scenarios they are equivalent. But they aren't strictly so - and that is where trading opportunities may lie (unlike in index options which are European and continuous dividend assumptions basically hold) .