Covered Calls vs. Naked Puts

[MTE]

Quote from aradiel:

So if the carry cost is not zero, the market will not give the same extrinsic value to calls and puts, right?

No, if carry is not zero then the call's extrinsic value will be greater by the amount of carry. If you adjust for carry then it will be the same.

So this is not a mispricing nor it is an arb, this is put-call parity.

That is, if you were to sell the call, buy the put and the stock to lock in the "extra" extrinsic value in the call then you would pay the carry on the long stock and thus your profit will be zero.

 

[piezoe]

I'm in agreement. I don't like covered calls except if i own the stock already and we are in a strong up market, and i don't mind taking my profit on the stock if called. I have sold many naked puts over the years and profited from that nicely. Always backed by cash and never on margin for that. If the current pullback turns into a correction and we get down to the 1050 to 970 area i'll be selling expensive puts once more on stocks i would be happy to acquire. I did the same thing when we were near the devils bottom in early 2009. Good investing/trading is a waiting game --waiting for opportunity.

Quote from failed_trad3r:

I am new to options but an option strategy combined with stocks is best i think when writing options.

for example if you want to own stocks, sell puts, it gives other people the right to sell at the strike to you. So if you want to buy a stock at a certain price (strike) naked put is great way to lower the cost, or make money.

or if you want to sell a stock, but dont think it will appreciate much, but dont want to sell for a loss, you can sell a covered call. This works out even better if you get regular dividends with the stock.

If you write options naked without the intention to ever own stock I think it's a gamblers game.

 

[aradiel]

Quote from aradiel:

So if the carry cost is not zero, the market will not give the same extrinsic value to calls and puts, right?

Quote from MTE:

No, if carry is not zero then the call's extrinsic value will be greater by the amount of carry. If you adjust for carry then it will be the same.

So this is not a mispricing nor it is an arb, this is put-call parity.

That is, if you were to sell the call, buy the put and the stock to lock in the "extra" extrinsic value in the call then you would pay the carry on the long stock and thus your profit will be zero.

So my assumption was right. The thing is at least one poster that I can remember in this thread said the oposite: that a put have more extrinsic value than the equivalent call.

Also, the response that equivalent puts and calls should have the same extrinsic value ajusted for the carry cost is, at least, confusing. It is the same to say that all stock prices should be the same, ajusted for risk.

In my opinion, and I am not a native english speaker, is that it should be put this way: "puts and equivalent calls have different extrinsic values because the market compensates the different carry costs of each other trade".

 

[spindr0]

Quote from aradiel:

So my assumption was right. The thing is at least one poster that I can remember in this thread said the oposite: that a put have more extrinsic value than the equivalent call.

It can happen. For example, take your example of XYZ at 30 and the premiums of the 33 put and call being $3.30 and $ .30

What happens to those premiums (amount of extrinsic) if now you say there's a $1 dividend tomorrow?


Also, the response that equivalent puts and calls should have the same extrinsic value ajusted for the carry cost is, at least, confusing. It is the same to say that all stock prices should be the same, ajusted for risk.

There are a lot of confusing things in life. But what does the risk of a different stocks have to do with the pricing of derivatives, eg. options, ala put call parity?

 

[donnap]

Quote from aradiel:

So my assumption was right. The thing is at least one poster that I can remember in this thread said the oposite: that a put have more extrinsic value than the equivalent call.

Also, the response that equivalent puts and calls should have the same extrinsic value ajusted for the carry cost is, at least, confusing. It is the same to say that all stock prices should be the same, ajusted for risk.

In my opinion, and I am not a native english speaker, is that it should be put this way: "puts and equivalent calls have different extrinsic values because the market compensates the different carry costs of each other trade".

What is a put and equivalent call? Do you mean a put and call at the same strike and expiration?

"puts and equivalent calls have different extrinsic values because the market compensates the different carry costs of each other trade."

Yes well said. Er, but there are exceptions when put-call parity flies out the window.

When a stock becomes hard to borrow or short selling is not permiited, then the short underlying arb is off the table. Generally, put prices may rise with no corresponding change in the call price.

Sorry

 

[aradiel]

Quote from donnap:

What is a put and equivalent call? Do you mean a put and call at the same strike and expiration?

"puts and equivalent calls have different extrinsic values because the market compensates the different carry costs of each other trade."

Yes well said. Er, but there are exceptions when put-call parity flies out the window.

When a stock becomes hard to borrow or short selling is not permiited, then the short underlying arb is off the table. Generally, put prices may rise with no corresponding change in the call price.

Sorry

Ok, I will add "ceteris paribus" in the end of each post of mine...

 

[donnap]

Here is a real time example for you to ponder.
Earlier today RIMM @ 69.30

May 65C bid/ask @ 5.00 x 5.10

May 65P bid/ ask @ .72 x .73

No div, ST interest rate negligible.

If a fair value for the put was about .73, then the call should sell for about 5.03. The put price was attainable, but the attainable call price is 5.10. It is not certain that you could have bought the call for less - at that time.

The market is the final arbiter of option prices.

 

[stoic]

Quote from donnap:



The market is the final arbiter of option prices.

Finally someone stated the real bottom line. "The market price" as the final word.

All the rest of the Greeks, and IV this, and Theta vs. that are all theoretical. One thing I've noted in the last 30 years of trading is, in bull markets the calls trade higher, in bear market the puts provide the greater premiums.

Market sentiment rules.

 

[charts]

Quote from stoic:

Finally someone stated the real bottom line. "The market price" as the final word.

All the rest of the Greeks, and IV this, and Theta vs. that are all theoretical. One thing I've noted in the last 30 years of trading is, in bull markets the calls trade higher, in bear market the puts provide the greater premiums.

Market sentiment rules.

All the greeks are calculated from the price, not the other way around ...

 

[stoic]

Quote from charts:

All the greeks are calculated from the price, not the other way around ...

That is true. The Price at that moment in time. The option rarely trades at the stocks HV so the "theoretical model" calculates the IV.

All the values produced are based on "theoretical" option pricing models. The IV today is rarely the IV tomorrow. The Delta is rarely the true delta, Theta will slow and accelerate. Vega is the amount that the "theoretical" price will change if the volatility of the asset moves........yada yada yada....

I'm not saying that these values are useless. What I am saying is that options are irrevocably tied to the movement of the underlying. Higher call premiums can be had in more optimistic markets. Fearful and pessimistic markets make high put premiums. I will calculate the Greeks, but they hold very little influence in my trading decisions.