Cost of insurance using options

[stock777]

naked puts much more dangerous, when the weather gets nasty, you catch cold.

 

[atticus]

Quote from Neutral:

Assuming efficient markets, one cannot make money from buying/selling options without an edge about the direction of the underlying, so it seems to me that the long-term cost of insuring a security about which the owner has no edge or opinion is zero. But wouldn't this allow a "noise trader" to purchase a protective option and wait out the adverse moves (as opposed to getting stopped out) and take profits when the underlying moves in the "right" direction? And then repeat the process. The fact that the option was purchased as protection shouldn't make the option itself to be more or less likely to be profitable over the long run, and its average cost should converge to zero. I feel that this is the equivalent of a "perpetual motion machine", and should not be possible. What am I missing?

It certainly makes sense to buy the "synthetic call" on shares you intend to own for the long-term. Low vol-decile, macro-risk, vol-ramp into earnings, etc.

Otherwise you're better off simply buying the call or put outright. There is some holding risk on rates when contrasting a natural and synthetic, but that's beyond what we're discussing here.

 

[spindr0]

atticus, do you have any links for dispersion related info that doesn't require a PHD to comprehend? Something a meat and poatoes trader could comprehend? Thx

 

[newwurldmn]

Quote from atticus:

It certainly makes sense to buy the "synthetic call" on shares you intend to own for the long-term. Low vol-decile, macro-risk, vol-ramp into earnings, etc.

Otherwise you're better off simply buying the call or put outright. There is some holding risk on rates when contrasting a natural and synthetic, but that's beyond what we're discussing here.

A long call vs a synthetic call will have different tax implications if the option expires worthless. A long call becomes a capital loss and in the synthetic call, the put becomes added to your cost basis and you can maintain the shape of your underlying tax status (long term perhaps).