buying stocks vs. options for short term trading

[spindr0]

Correct. The synthetics are clear. In my view, the strategies often aren't similar. Most people selling naked puts are doing so OTM to "bottom feed" for stocks on the cheap, with the knowledge that the small profit they get when not assigned is at least money in their pocket. Most people selling covered calls are doing so OTM so as to "juice" their returns, with the knowledge they are limiting their upside on a big run. The two are not synthetic because the strikes are not equivalent.

You missed the point.

If A = B then you can do either one of them and get the same result.
If A does not = B then they do not provide the same result.

We are talking about when A = B.
You are talking about when A does not = B and that isn't a synthetic.

IOW, when it's the same series, the two strategies are equivalent. When different, they are not.

As many here regularly point out, why do the simultaneous B/W and incur more frictional costs (B/A and commission) if you can do same series short put?

 

[jimmyjazz]

I didn't miss the point, we are on the same page. I fully understand that "synthetic" equals "same strike and expiration". Read my post more carefully, but honestly, I'm not interested in a pissing match. I was responding to a statement that seemed "global" in nature, not specific to replacing a short put with a covered call at the same strike (which is obviously the synthetic).

To clarify, I was responding to this statement: "Only reason for covered calls is - Put spread is too wide at that strike, but normally that's a problem on the call side because on CC's you trade ITM, whereas the naked put is OTM."

He was probably speaking in context of the idea of selling an OTM put, and I took it more broadly. My bad.

 

[misterkel]

I didn't miss the point, we are on the same page. I fully understand that "synthetic" equals "same strike and expiration". Read my post more carefully, but honestly, I'm not interested in a pissing match. I was responding to a statement that seemed "global" in nature, not specific to replacing a short put with a covered call at the same strike (which is obviously the synthetic).

To clarify, I was responding to this statement: "Only reason for covered calls is - Put spread is too wide at that strike, but normally that's a problem on the call side because on CC's you trade ITM, whereas the naked put is OTM."

He was probably speaking in context of the idea of selling an OTM put, and I took it more broadly. My bad.

More generally, I'm responding to the self-contradictary idea that CC's are conservative and naked puts are high-risk. Since they have the exact same outcome at same strike, that notion is a direct contradiction.
I actually mean to help people who think they're making a nice safe bet with CC's and seeing those crazy naked put sellers as lunatics who risk everything.

I actually think there is a difference in that you can enter a higher margin position with naked puts than with CC's.

 

[Kevin Schmit]

Kevin, if you box a profitable vertical and hold to expiry, does it gain value over that time frame?

No, box has rho (rate) risk only (except for the above mentioned pin and assignment risks). All other greeks besides rho are neutral. Long box earns risk-free rate, short box pays it but either way likely to be much less than transaction costs.

For pure d1 pdt-evading daytrading you can also just buy or sell the synthetic and "exit" by selling or buying a synthetic at another strike.

Overnight margin on boxes is minimal, but the downside is keeping track of them all so you don't inadvertently close a trade within a day.

I have never tried this type of daytrading, but know people who have. I think there was a thread on this a here a few years ago.

 

[ET180]

I actually think there is a difference in that you can enter a higher margin position with naked puts than with CC's.

That's true for non-portfolio margin accounts. The buying power reduction on a short naked put is less than the buying power reduction on owning 100 shares of the underlying. I think the difference is around 5:1 depending on the broker.

http://tastytradenetwork.squarespace.com/tt/blog/buying-power

I think PM treats long 100 shares of XYZ vs. 1 short XYZ ATM put as closer to the same because both positions actually have the same risk (ignoring dividends). I recently did some tax loss harvesting on a few of my positions by selling shares at a loss and subsequently shorting equivalent number of puts at my break even expiring sometime next year. This provides me with 2 advantages - generating losses to offset gains to reduce tax liability this year and 2) allow me to earn additional interest on my credit balance.

 

[beerntrading]

I recently did some tax loss harvesting on a few of my positions by selling shares at a loss and subsequently shorting equivalent number of puts at my break even expiring sometime next year. This provides me with 2 advantages - generating losses to offset gains to reduce tax liability this year and 2) allow me to earn additional interest on my credit balance.

Am I missing something here? Because that looks a lot like a wash sale.

 

[ET180]

Am I missing something here? Because that looks a lot like a wash sale.

I thought it would be too, so I checked with my tax consultant. He stated:

"A wash sale is only if you sell an investment and then acquire the same investment (or acquire an option to buy or sell that investment) within the defined window. If you are selling, but not subsequently acquiring, then there is no new investment for which to adjust its basis."

So since the option won't possibly be assigned until over a month (several months in my case) after the stock was sold, it misses the 30 day window for a wash sale.

 

[beerntrading]

I thought it would be too, so I checked with my tax consultant. He stated:

"A wash sale is only if you sell an investment and then acquire the same investment (or acquire an option to buy or sell that investment) within the defined window. If you are selling, but not subsequently acquiring, then there is no new investment for which to adjust its basis."

So since the option won't possibly be assigned until over a month (several months in my case) after the stock was sold, it misses the 30 day window for a wash sale.

Yes, but loses are carried into the cost basis of the new position (the short put). It's the date acquired not the date disposed here. I believe this is one of the few wash sales that the law is explicit about. But more to the point, given that this does exactly what the wash sale rule is designed to prevent, it's a wash sale.

 

[sle]

I recently did some tax loss harvesting on a few of my positions by selling shares at a loss and subsequently shorting equivalent number of puts at my break even expiring sometime next year. This provides me with 2 advantages - generating losses to offset gains to reduce tax liability this year and 2) allow me to earn additional interest on my credit balance.

Do you think this is something that people commonly do? I.e. liquidate their losing positions and opening a short put at lower or the same level?

 

[newwurldmn]

Do you think this is something that people commonly do? I.e. liquidate their losing positions and opening a short put at lower or the same level?

I believe that qualifies as a wash sale. For a wash sale the irs looks at options with the same cusip as the underlying.