Covered Calls and Implied Volatility

atrp2biz · Aug 16, 2016

[shakes head]

Plot P/L vs. underlying. They look the same. If they don't, just stick with buying plain vanilla stocks.

Abundance Magnet · Aug 16, 2016

just because a graph shows similar values doesn't mean they are the same. In theory yes, but a graph has no context. As a recent example, imagine if you had a PUT on VRX back when it was near its peak. there is more continued downside risk after you hold the stock. stairs up and elevator down. To me, that's the difference in them, and in their risk reward profiles.

atrp2biz · Aug 17, 2016

*sigh*

Martinghoul · Aug 17, 2016

atrp2biz said:
*sigh*

Indeed...

Martinghoul · Aug 17, 2016

ironchef said:
From an equivalency point of view, they are the same. However, there must be subtle differences otherwise brokers won't sell the notions that covered calls are low risk and naked puts are deemed too risky and not allowed for newbies (@ my brokerage) until we become "experienced" traders.

So what exactly are the differences?

http://www.moneyshow.com/articles/optionsidea-27452/one-is-best--naked-puts-or-covered-calls/?page=2

newwurldmn · Aug 17, 2016

Abundance Magnet said:
just because a graph shows similar values doesn't mean they are the same. In theory yes, but a graph has no context. As a recent example, imagine if you had a PUT on VRX back when it was near its peak. there is more continued downside risk after you hold the stock. stairs up and elevator down. To me, that's the difference in them, and in their risk reward profiles.

How would being short a put be different than having a covered call in VRX in your example? Since it's historical, you could show with actual market prices.

newwurldmn · Aug 17, 2016

stepandfetchit said:
They are NOT the same! With an unexpected event causing the underlying to drop, you are not only hit by the price change of the underlying, but the sometimes extreme increase in Volatility! Exiting with the family jewels in tact may not be possible, but with a Covered Call, the Call becomes worthless, and the underlying may be exited as one may expect (with only the price change of the underlying to Eat). Been there done that, will not repeat.

Only difference in your example could be liquidity in the put option vs the stock, but in reality I have never seen this to be an issue.

Abundance Magnet · Aug 17, 2016

i'm not an expert on options, hence my questions regarding it. Yes, to liquidity to being a difference. liquidity of course then affects the bid-ask spread... I still feel the context of the underlying stock to be the difference. elevator down, stairs up. Yes, they seem theoretically the same, but that doesn't mean that they are.

JackRab · Aug 18, 2016

Surely OP wants to get some extra cash with his longer term investments in equity by selling OTM calls...

Which is different from just selling naked puts... since the starting point in this strategy is to hold equity.

Anyway... bid ask spread shouldn't really widen much during the day, only in high volatile situations and when macro-figures are due.
Generally speaking, IV rises mainly towards any expected volatile movement, quarterly figures etc., drops afterwards. And there sometimes is a change in IV at the start and end of the week...

Abundance Magnet · Aug 18, 2016

Thanks JackRab. That is exactly right. My plan is to hold onto the stock and sell OTM calls. If I called out, so be it. It's a nice profit. Ideally, I add income to the holding.
The conversation got diverted. Thanks for bringing it back on track!