Covered Calls vs. Naked Puts

[jwcapital]

Quote from stoic:

When I calculate the marging requirement, there's a big differance.

What numbers did you use?

I have IB as my broker. It allows me to check margin requiremnts before placing a trade. I ran the NP at 5% OTM and compared it to the CC in my examples. The SPAN margins were virtually the same. For futures options, margins are calculated much differently than equities and index options.

 

[jwcapital]

Quote from spindr0:

Is it the norm for ES that the time value of the put is higher than the call?

For equities, margin for a CC will be 2.5-3x that of a NP unless it's very deep ITM. Advantage: NP.

The time value of the put, either DITM or OTM, is higher than the call. For instance, the may 1125 put had value of 7 when the ES was 1190. The 1255 call was only worth 2.

 

[atticus]

Quote from jwcapital:

I have thought about this. They would be the same depending on the strikes of the put and call. Suppose I am trading the ES and it is at 1200. I want to sell a naked put. I go out 5% and sell the 1140 Put and get a premium. Now, buy the ES at 1200 and sell the 1140 call. Now, to me, these trades look the same. Both have fixed profit if the underlying stays above 1140. Here's the difference. You will find that the time value of the short put is higher than the time value of the short call.

You're wrong.

 

[atticus]

Quote from atticus:

These threads are ridiculous. The only risk/opportunity cost is rho (holding both positions simultaneously) over the duration the positions are held. There is no inherent benefit if you exclude an interest-rate prediction/dividend surprise or commissions. If you are clairvoyant and know rates will fall precipitously, trade the CC, but it's not going to cover the costs associated with the position. IOW, there is not enough rate-risk embedded in the position to make for an outright spec.

All natural/synthetic risks are limited to interest rates. Conversions, rolls, etc., are bets on interest rates.

Edit: All "long" arbs trading under, and all "short" arbs trading over terminal value.

 

[atticus]

Quote from jwcapital:

The time value of the put, either DITM or OTM, is higher than the call. For instance, the may 1125 put had value of 7 when the ES was 1190. The 1255 call was only worth 2.

You're quoting the outside combo; otherwise known as the risk-reversal. The covered call and short put much share a strike to maintain equivalence (static time).

 

[aradiel]

To say CC and NP have profit graphs with the same shape is one thing, but are also those graphs identical, with the same (not only parallel to each other) abscissa and ordinate intersections?

For example, lets say right now the stock/future/commodity XYZ is being traded at $ 30 and its june 33 calls are traded at 0.30. I buy one XYZ and write one june 33 call against it.

In this trade, at expiration, my breakeven would be XYZ at 29.70, my max gain 3.30 and my max loss 29.70.

If I would replicade this position with a naked put, with the same breakeven, max gain, max loss points, the june 33 put would have to be trading exactly at 3.30... but will it? This is an honest question since where I trade (Brazil) there is virtually no put trading and I dont have a clue. Will the put be above 3.30, bellow it? What variables are taken into consideration?

 

[Mike Okistini]

Quote from aradiel:



For example, lets say right now the stock/future/commodity XYZ is being traded at $ 30 and its june 33 calls are traded at 0.34. I buy one XYZ and write one june 33 call against it.

In this trade, my break-even would be XYZ at 29.70, my max gain 3.30 and my max loss 29.70.

$30 - $0.34 = $29.66 breakeven at expiration
Max Gain = $3.34
Max Loss = $29.66

 

[aradiel]

Quote from Mike Okistini:

$30 - $0.34 = $29.66 breakeven at expiration
Max Gain = $3.34
Max Loss = $29.66

I meant a .30 call premium, already corrected the typo, thanks for the heads up.

 

[aradiel]

Quote from atticus:

Edit: All "long" arbs trading under, and all "short" arbs trading over terminal value.

Does it mean that calls and puts should have the same time value, no matter the nature of the underlying, the strike, the volality or the remaining time until expiration?

 

[lindq]

Quote from aradiel:


I can think of at least one major reason to why one is actually better - or more efficient - than the other.

What they both share is that they are very lame strategies.

Limited upside with unlimited downside.