Covered Call vs. Short Put

[767trader]

Quote from Martinghoul:
And what was that about the carry?

Interest rates. With higher interest rates, the cash-secured put is more valuable than the covered stock. The cash used to secure the put, over the same term as the covered call, earns interest. Using a covered call with an underlying stock, the forward price of the stock must be sufficiently above what you purchased it for to offset the lost value of the risk-free interest rate. Obviously negligible currently.

Personally, I'd prefer the cash-secured put over the covered call; in my mind, it's just easier to manage. That's just a personal preference, however.

 

[Martinghoul]

Quote from 767trader:
Interest rates. With higher interest rates, the cash-secured put is more valuable than the covered stock. The cash used to secure the put, over the same term as the covered call, earns interest. Using a covered call with an underlying stock, the forward price of the stock must be sufficiently above what you purchased it for to offset the lost value of the risk-free interest rate. Obviously negligible currently.

Personally, I'd prefer the cash-secured put over the covered call; in my mind, it's just easier to manage. That's just a personal preference, however.

My question was addressed at tj, specifically, 'cause I wanted to hear his thoughts on the subject. I am aware of the rates aspect and I think atticus has mentioned it earlier in this thread.

 

[767trader]

Quote from Martinghoul:

My question was addressed at tj, specifically, 'cause I wanted to hear his thoughts on the subject. I am aware of the rates aspect and I think atticus has mentioned it earlier in this thread.

I wasn't responding for him; he's welcome to answer your question directly if he wishes.

 

[tenthousandmen]

It's generally easier to sell than to buy in high liquidity... a short put will save you a point or higher. Then again, you have to close the position later, where you may or may not have slippage.

Dividends shouldn't be a big concern for intraday trades. Besides, you shouldn't feel too bad for paying the face you just ripped off a little of your winnings, right?

 

[atticus]

Quote from tenthousandmen:

It's generally easier to sell than to buy in high liquidity... a short put will save you a point or higher. Then again, you have to close the position later, where you may or may not have slippage.

Dividends shouldn't be a big concern for intraday trades. Besides, you shouldn't feel too bad for paying the face you just ripped off a little of your winnings, right?

Save you a point?

 

[Random.Capital]

Quote from tenthousandmen:

It's generally easier to sell than to buy in high liquidity...

Bad Things generally coincide with periods of low liquidity.

 

[FSU]

Another big reason to sell a put vs a covered call,

Any hard to borrow stock will give you a great advantage in selling the put. If you write a covered call, you are allowing your brokerage firm to make extra money by loaning out your long stock. If you sell the put, you are essentially capturing most of this extra income.

 

[dragonman]

Quote from FSU:

Another big reason to sell a put vs a covered call,

Any hard to borrow stock will give you a great advantage in selling the put. If you write a covered call, you are allowing your brokerage firm to make extra money by loaning out your long stock. If you sell the put, you are essentially capturing most of this extra income.

I understand that in such situation my broker will not make the extra money but I didn't understand how can I capture this extra income. Could you explain?

 

[FSU]

Quote from dragonman:

I understand that in such situation my broker will not make the extra money but I didn't understand how can I capture this extra income. Could you explain?

To create a synthetically long position in a stock, you would be long a call, and short a put of the same strike

In a hard to borrow stock, extra premium is written into the puts and is taken out of the calls. So in a normal buywrite position you are short the calls and long the stock, missing out on the "extra" value of the puts and getting hurt on the "lesser" value of the calls you sold.

You can see this by looking at Groupon (a hard to borrow stock). The Jan 30 puts went out at 10.20-10.80 so a value of about 10.50. The stock is 20.63, so there is over 1 in premium in the puts, while the calls are about 0. In a non hard to borrow stock, these puts would be at parity. So if you did the 30 buywrite vs selling the put, you would lose out on over a 1 in extra premium.

This also shows if you want to get long a hard to borrow stock, you are much better off selling a deep put vs buying the stock outright.