Covered Call vs. Short Put

atticus · Dec 23, 2011

The difference between the two (assuming =vol and haircut) is the rho of a box under some forward rate var. IOW, there is little tangible difference. It's a bet on rates, albeit a very, very small bet.

newwurldmn · Dec 23, 2011

The only material difference I think about is related to taxes.

A covered call that is not exercised gets tax defferal (goes into the cost basis of the stock and realized when the stock is sold) vs a short put gets taxed in the year it expires.

Don Bright · Dec 23, 2011

Quote from newwurldmn:

The only material difference I think about is related to taxes.

A covered call that is not exercised gets tax defferal (goes into the cost basis of the stock and realized when the stock is sold) vs a short put gets taxed in the year it expires.

In the retail world, maybe...not in the "mark to market" world. Good point however, everyone should apply all factors to their decision making.

Good to hear from Atticus.... hope all is going well with you?

Don

newwurldmn · Dec 23, 2011

Quote from Don Bright:

In the retail world, maybe...not in the "mark to market" world. Good point however, everyone should apply all factors to their decision making.

Don

Agreed.

stoic · Dec 23, 2011

Quote from newwurldmn:

The only material difference I think about is related to taxes.

A covered call that is not exercised gets tax defferal (goes into the cost basis of the stock and realized when the stock is sold) vs a short put gets taxed in the year it expires.

That would be incorrect. Any Option not exercised, long or short is treated the same for taxes. Only when they are exercised does it have a possible adjustment to the cost basis on the underlying.

newwurldmn · Dec 23, 2011

Quote from stoic:

That would be incorrect. Any Option not exercised, long or short is treated the same for taxes. Only when they are exercised does it have a possible adjustment to the cost basis on the underlying.

You are correct. I should shut up about this.

tradingjournals · Dec 24, 2011

Quote from 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!

In terms of absolute dollars, they differ in these senses: (1) one gains from carry changes, the other loses from carry changes; (2) implications on taxes. There are also a couple other very fundamental and valuable differences between the two, not writing them here, because not everything should be written in a forum.

Martinghoul · Dec 24, 2011

Quote from tradingjournals:
In terms of absolute dollars, they differ in these senses: (1) one gains from carry changes, the other loses from carry changes; (2) implications on taxes. There are also a couple other very fundamental and valuable differences between the two, not writing them here, because not everything should be written in a forum.

Really? There's some sort of a massive monumental secret that you ain't telling us about then? 'Cause it's just too valuable? And what was that about the carry?

At any rate, on a serious note, I can think of one important (and obvious) difference that I haven't heard mentioned earlier (I could be wrong). Specifically, I mean the pin, if the options are physically-settled.

dragonman · Dec 24, 2011

Quote from Martinghoul:

Really? There's some sort of a massive monumental secret that you ain't telling us about then? 'Cause it's just too valuable? And what was that about the carry?

At any rate, on a serious note, I can think of one important (and obvious) difference that I haven't heard mentioned earlier (I could be wrong). Specifically, I mean the pin, if the options are physically-settled.

And in this regard the covered call or the short put may be preferable? In both of them you may be exposed to the pin risk.

Martinghoul · Dec 24, 2011

Quote from dragonman:
And in this regard the covered call or the short put may be preferable? In both of them you may be exposed to the pin risk.

I dunno what's preferable... Depends on a variety of factors, I imagine.