Covered call vs. short put?

[atticus]

Quote from jwcapital:

With a covered call, you actually have a chance for huge gains compared to fixed gains for the short put. Think about delta for a minute. The underlying has a delta of 1 an the short call has a delta of .5. Suppose the underlying goes up 60 points (I trade the ES S&P 500, so this is very possible). Your underlying goes up 60 points and your short call only goes up 30. You are now up 30 points or $1500.00 for 1 covered call. The premium received these days is about 26 points (or $1300.00). I would simply close out the trade, and pocket the $1500.00. Your short put has a fixed profit, and for what it's worth, has a higher margin requirement for the same $1300.00 premium. Again, the biggest difference is the chance for higher profit from the covered call than the short put. On the other hand, I beleive that you get better downside protection from the short put, if it is "ideally" placed.

You're posting the same misinformation on multiple threads. Delta is not stationary. The put and CC are equivalent for the purposes of this discussion (ES options).

 

[spindr0]

Quote from jwcapital:

With a covered call, you actually have a chance for huge gains compared to fixed gains for the short put... Again, the biggest difference is the chance for higher profit from the covered call than the short put.

I don't agree. Wayne, who replied before you posted a good answer on another chain (paraphrased here):

A put is a call and a call is a put - because adding (or subtracting) the underlying converts one to the other.

I'm not sure what the correct technical terminology is to explain it (perhaps someone else will) so a wobbly example is the best I can do. If the ATM call has a delta of 55 and the ATM put has a delta of -45, a round lot of the underlying equates them. In a conversion you have:

stock +put = call

100 + (-45) = 55

Since the absolute value of the option components equals 100, at -45/55 or -40/60 or whatever, they're still going to be equivalent. There won't be a huge gain from one side over the other.

 

[rluser]

I see a difference in addition to the number or instrument spreads and their size. There is also the dividend spread. If a dividend is due and I think the market overestimates its size, it seems I should sell puts or buy calls. The converse is true if I think the market underestimates the dividend, no? This is not so relevant for a european exercise or broad index.

 

[jwcapital]

Quote from Martinghoul:

This is wrong on many levels (ref atticus).

Not true. Here is an example--Last year, January 2008, the ES plunged 60 points on MLK's birthday. That Friday, I placed 4 covered puts ATM. After the 60 point plunge, my underlying showed a profit of $12,000.00 and my puts showed a loss of $7,000.00 for a net gain of $5,000.00. Yes, the gain was less than the total premiums received, but there was no way I was waiting until expiration to try to make the extra gains. As things turned out, if I waited, I would have turned a nice gain into a loss. So, with due respect, the math held.

 

[nitro]

Quote from spindr0:

If the options aren't mispriced, the two strategies yield the same result (the dividend, if any, and carry cost are priced into the options.

The advantage of the short put is potentially fewer transactions which saves you on slippage and commissions.

That is not quite correct. Skew is a factor anytime you are buying or selling synthetics vs the vanilla. In fact, to a professional options trader, they can be vastly different.

 

[atticus]

Quote from jwcapital:

Not true. Here is an example--Last year, January 2008, the ES plunged 60 points on MLK's birthday. That Friday, I placed 4 covered puts ATM. After the 60 point plunge, my underlying showed a profit of $12,000.00 and my puts showed a loss of $7,000.00 for a net gain of $5,000.00. Yes, the gain was less than the total premiums received, but there was no way I was waiting until expiration to try to make the extra gains. As things turned out, if I waited, I would have turned a nice gain into a loss. So, with due respect, the math held.

This is proof of nothing. What does waiting have to do with P-C parity? Price an ES Aug 1010 covered call against a simultaneous ES Aug 1010 naked put. Paper-trade the position and you will see the equivalence, empirically.

 

[dagnyt]

Quote from jwcapital:

That Friday, I placed 4 covered puts ATM.

You sold synthetic calls and the market dropped.

That's why you had a profit.

Mark

 

[atticus]

Quote from dagnyt:

You sold synthetic calls and the market dropped.

That's why you had a profit.

Mark

Of course, made absurd by the fact he's arguing w/o accounting for the gain on the naked "natural" call.

 

[spindr0]

Quote from nitro:

That is not quite correct. Skew is a factor anytime you are buying or selling synthetics vs the vanilla. In fact, to a professional options trader, they can be vastly different.

I can't dispute anything that you say regarding what happens on a professional option traderr level since it's beyond my realm of experience. I'm a lowly retail trader

But let me ask this. If the options are priced fairly, aka at theoretical levels, is there a difference in the P&L of a natural versus its synthetic??

 

[atticus]

Quote from nitro:

That is not quite correct. Skew is a factor anytime you are buying or selling synthetics vs the vanilla. In fact, to a professional options trader, they can be vastly different.

Synthetics vs. the vanilla? Huh? I am fairly certain that both the synth and natural are vanillas.