Covered Calls vs. Naked Puts

[Martinghoul]

Wow, and here I thought that put-call parity was something blindingly obvious, the sort of thing that one learns before one ever starts looking at options.

The mind boggles at the actual number of people here claiming that cc's are not the same as naked puts, i.e. that put-call parity doesn't hold. For the record, as atticus mentions, arbitrage that relies on put-call parity can be traced back to Ancient Israel, as well as Medieval England.

 

[failed_trad3r]

naked put is better since the cash you don't use get sweeped into a money market fund overnight.

 

[charts]

Quote from failed_trad3r:

naked put is better since the cash you don't use get sweeped into a money market fund overnight.

Be sure that this is included in the put's price too ... Check the B-S formula!

 

[dagnyt]

Quote from Martinghoul:

Wow, and here I thought that put-call parity was something blindingly obvious, the sort of thing that one learns before one ever starts looking at options.

The mind boggles at the actual number of people here claiming that cc's are not the same as naked puts, i.e. that put-call parity doesn't hold. For the record, as atticus mentions, arbitrage that relies on put-call parity can be traced back to Ancient Israel, as well as Medieval England.

You cannot educate those who want to be ignorant.

Mark

 

[white17]

Not that it will matter but, on page 244 of ""Options; Essential Concepts and Trading Strategies"", is a section titled Covered Writing versus Put selling: A Difference where there is None.

Here's the first sentence.

"Starting from a cash investment and going to either a covered write or a short put, results in exactly the same payoff diagram"


Me again:

Whoever mentioned sythetics earlier was on target.

The sythetic equivalent of the short put is long stock & short call.

IOW, the CC position is identical to the short put.

 

[Jerkstore]

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

Negative stock carry rates due to hard to borrow IS the carry rate that the others keep referring to. There is quite a bit of "carry" risk in trading equity options.

Options traders don't typically measure extrinsic value from the underlying stock, but rather from the forward value of the underlying stock (meaning they add carry to the underlying). Therefore, puts and calls will basically have the same extrinisic value.

However, you must also account for early exercise value if you are trading american style options. The early exercise value can be quite significant for ITM options.

It is also prudent to note that stock options will have far more early exercise value than options that expire into futures (such as the ES). However, some products have early exercise structural risk that is completely unique, like the OEX options at the CBOE.

If you want formulas, go buy the Natenburg or Hull books. Both are industry classics.