Covered Call vs. Short Put

[dragonman]

Hi, if you decide that you want to have an exposure to the underlying by using a covered call, which considerations do you take into account when deciding to use a covered call and not shorting a cash secured put (which gives the same payout ratio)?

I know they are similar strategies but I am sure there should be some parameters that can help to indicate which strategy is preferrable.

For example, if the stock is at 50, and the price of both the calls and the puts regarding the 50 strike is 1.00, what would you do -- a covered call or a short put?

Any response will be appreciated. Thanks!

 

[spindr0]

Do the put:

1) Commissions and slippage
2) Ease of executing 1 position instead of two (fast market)

 

[nazzdack]

Quote from dragonman:
----using a covered call....
----considerations....
----parameters....

Option pricing theory aside, with the covered-call, you can have the "prestige and glory" of collecting dividends.

 

[noob_trad3r]

I prefer to short the put. also it seems the SPY and IWM especially during panic downswings have a better skew on the put premium due to the panic last minute buyers and the fear factor limiting the number of put sellers willing to take the risk.

and if the put option crosses the ex-div date then you collect the dividend up front since its priced into the formula.

 

[spindr0]

Quote from nazzdack:

Option pricing theory aside, with the covered-call, you can have the "prestige and glory" of collecting dividends.

There's that plus covered call writers collect FREE money. If you sell the naked put, you might have to buy the stock and that costs money!!!

 

[atticus]

Quote from noob_trad3r:

I prefer to short the put. also it seems the SPY and IWM especially during panic downswings have a better skew on the put premium due to the panic last minute buyers and the fear factor limiting the number of put sellers willing to take the risk.

and if the put option crosses the ex-div date then you collect the dividend up front since its priced into the formula.

Ugh.

 

[Maverick74]

Quote from atticus:

Ugh.

Amazing isn't it Atty? We can have 500 threads over this and these guys still don't understand it.

 

[donnap]

Quote from spindr0:

Do the put:

1) Commissions and slippage
2) Ease of executing 1 position instead of two (fast market)

Hmmm...I was wondering if sometime - you and OC could have a discussion on NP vs. CC.

 

[JJacksET4]

dragonman,

I realize in your example you mentioned a stock at $50 and selling a 50 Strike Call or shorting a 50 Strike Put, however, I have found alot of option documentation shows example like such:

Stock at $50 - Buy the stock and sell the 55 strike call
or:
Stock at $50 - Sell the 45 strike put

You CAN use either method to do the same thing of course, but the CC might seem to be used by people when they are moderately bullish and wouldn't mind gaining on the stock up to $55, where the put sell might be used when they are at least bullish enough to figure the stock can remain above $45.

Just my experience.

JJacksET4

 

[noob_trad3r]

Quote from Maverick74:

Amazing isn't it Atty? We can have 500 threads over this and these guys still don't understand it.

Explain. I sell the SPY ATM put at 3.60 and if the stock goes ex-dividend friday, and underlying stays around the same price you see the IV drops on that contract. the put premium goes down ex-dividend.

So are you saying I can just go long stock and buy ITM puts before ex-dividend and collect a free dividend and just exercise the put on ex-div day?


Last I knew the projected dividends are priced into the put premium.