Covered Call vs. Short Put

daveyc · Dec 21, 2011

Quote from spindr0:

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

:eek:

i love this post! so true and its a wonder why cc seminars continue to sell out and people walk out thinking they have it all figured out until they realize that cc's can devastate one's account.

atticus · Dec 21, 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.

"Stays around the same price"? "IV drops" You expect an explanation from Mav?

No, neither of us are suggesting you're attaining dividend-arb. The only "arb" is the IQ-test associated with the street failing to exercise DITM calls.

mastacoli71 · Dec 21, 2011

Quote from spindr0:

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

:eek:

lol, i misunderstood your initial post. i personally sell puts. less cash outlay, less comms.

Don Bright · Dec 21, 2011

I just wanted to say "good luck" to Mav and Atticus (and a couple of others).... Maybe a good options class, not the "cc seminars" but the basics might be in order.

No offense to those asking good, honest questions... and yet I can see how Mav and Atticus might come off a little curt with their responses.

My only recommendation is before anyone actually start putting real $$ into any of these options strategies, is that they get themselves waaay past asking questions here on ET. You do have access to the best (mav and atticus), but you really need to fully understand this stuff yourself before placing any trades.

(Does this make sense to anyone, I'm just trying to help, seriously).

Don

stoic · Dec 22, 2011

Quote from daveyc:

i love this post! so true and its a wonder why cc seminars continue to sell out and people walk out thinking they have it all figured out until they realize that cc's can devastate one's account.

So can NP!

Don Bright · Dec 22, 2011

OK, so we've figured out that covered calls and naked puts can devastate an account. Good.

Now, I guess we could figure that a single commission naked put selling is an advantage in costs. Also in margin, since you have to buy stock and sell the call for a cc, very capital intensive, although hedging margin applies.

My thought is that if you already have a stock in the vault, or holding for dividends or even for speculation...then, ok, sell some calls against it. Going out and buying the stock and selling the call as a brand new position, might require some more thinking. Not to be dismissed, just thoroughly thought out.

FWIW,

Don

EliteThink · Dec 23, 2011

+1

just manage the position well.

stoic · Dec 23, 2011

Quote from Don Bright:

Going out and buying the stock and selling the call as a brand new position, might require some more thinking. Not to be dismissed, just thoroughly thought out.

Don

Going out and selling a Naked Put as a brand new position, might require some more thinking. Not to be dismissed, just thoroughly thought out.

Over the years I've seen a lot of accounts get wipe out on naked puts (and some brokerage firms that failed to control the risk go bust from it as well) Can't think of a single one that went bust from CCs

Maverick74 · Dec 23, 2011

Quote from stoic:

Going out and selling a Naked Put as a brand new position, might require some more thinking. Not to be dismissed, just thoroughly thought out.

Over the years I've seen a lot of accounts get wipe out on naked puts (and some brokerage firms that failed to control the risk go bust from it as well) Can't think of a single one that went bust from CCs

That's only because of the leverage. The leverage is 150% higher with a naked put.

Don Bright · Dec 23, 2011

Quote from stoic:

Going out and selling a Naked Put as a brand new position, might require some more thinking. Not to be dismissed, just thoroughly thought out.

Over the years I've seen a lot of accounts get wipe out on naked puts (and some brokerage firms that failed to control the risk go bust from it as well) Can't think of a single one that went bust from CCs

I think same risk reward. You can go to zero on a stock. A put can put you stock at the strike price.

Example (not that you need it of course, but some may).

Buy $50 stock, sell $55 call. for $2.00. Risk is $48 (stock to zero, but you get the $2 call premium). Stock goes to $100, you make money on stock, but get called at $55.

Sell $45 put (example). Stock goes fro $45 to $1000, you keep the premium. Stock goes to zero, you get "put" the stock at $45. So, $45 risk minus put premium.

Glad to discuss further, please provide examples.

Just trying to help.

Don