Covered Call vs. Short Put

kcgoogler · Dec 20, 2011

Quote from spindr0:

Do the put:

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

Another big advantage of selling the put is the cost of trade. Typically in a margin account it ends up cheaper than stock + call position.

-gariki

Maverick74 · Dec 20, 2011

Quote from 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

Those are completely different trades. It's like saying I could buy 100 shares of a stock if I'm bullish or 50 shares if I'm just a little bit bullish.

Maverick74 · Dec 20, 2011

Quote from noob_trad3r:

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.

No, the dividend is not "in" the put. It's priced into the put relative to the delta of the put. The IV does not drop. The dividend has nothing to do with the IV.

And there you go also using two different trades. An ATM call and ITM put are two different examples. An ITM put with a -100 delta will have the dividend priced in. The ATM option will have roughly 50% of the dividend priced in.

And you don't exercise an ITM put on ex-div, you exercise an ITM call ex-div. If you exercise your ITM put you will be short stock and you will now have to pay the dividend to the long stock holder.

spindr0 · Dec 20, 2011

Quote from donnap:

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

I'll do that when I become OC-Ded

spindr0 · Dec 20, 2011

Quote from noob_trad3r:

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.

If the UL stays around the same price post ex-div, it means that the UL rose by the amount of the dividend. Have you considered that IV fluctuates day to day? It could rise, drop or stay the same after ex-div. That's due to market forces, not the dividend.

Dividends are priced into both puts and calls. How much is priced into each depends on how far the UL is from the strike.

mastacoli71 · Dec 20, 2011

Quote from spindr0:

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!!!

Not sure I understand your logic on this. Can you clarify please.

kcgoogler · Dec 21, 2011

Quote from mastacoli71:

Not sure I understand your logic on this. Can you clarify please.

what logic

. spindr0 is most likely joking; or if not then he shouldnt be trading options for now. They are both exactly the same trade. No free money here

.

-gariki

JJacksET4 · Dec 21, 2011

Quote from Maverick74:

Those are completely different trades. It's like saying I could buy 100 shares of a stock if I'm bullish or 50 shares if I'm just a little bit bullish.

I'm aware they are different trades - the OP was asking why someone might choose one over the other. I was showing that in many examples in text, etc. CCs are shown as selling the higher strike, shorting puts are shown as selling the lower strike.

JJacksET4

donnap · Dec 21, 2011

Quote from JJacksET4:

dragonman,

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

JJacksET4

Yes, and you often see better liquidity with OTM options.

If you can gain or save a few cents with the OTM CC over the ITM NP, it is the better choice.

IOW, ITM option trades may be prone to greater slippage.

spindr0 · Dec 21, 2011

Quote from mastacoli71:

Not sure I understand your logic on this. Can you clarify please.

Covered call writers never lose money on the options sold... tho sometimes the underlying stock gives them a wee bit of a problem

:eek: