Covering naked call options

[Robert Morse]

I have done this many times. And "customers" would quote an option vs stock spreads delta neutral every day when I was on the floor. If the Delta was 50, this would be buying STOCK vs selling 2 calls. It is done all the time. You are betting the shares will not move much.

here is no advantage to selling a naked call on top of a covered call.

 

[wxytrader]

we can replicate a 65-strike short straddle (65-strike short call and 65-strike short put) by replacing its short put component with long stock and another 65-strike short call:

Hmm I see now. It's like putting on a short staddle using existing shares instead of selling an actual straddle. I see on the P/L the synthetic performs the same as the regular short staddle. Thanks D!

 

[Overnight]

Hmm I see now. It's like putting on a short staddle using existing shares instead of selling an actual straddle. I see on the P/L the synthetic performs the same as the regular short staddle. Thanks D!

It is good on you that you saw what was explained to you, and you took it in stride while being lambasted by destriero. It is kinda' horny.

 

[TheDawn]

The only negative is if the price moves down significantly after the buy order is fulfilled.

That "only negative" can be very significant and eventually you will have to face the music by taking a loss. Imagine the original purchase price of the stock was $50, now the stock has dropped to $30, you won't be able to write the call option with strikes above $50 anymore because you won't be able to earn any premiums so you will have no choice but to write the call option with strike at $30. Let's say the price actually went up to $32, your stock will be called away unless you close the position, so you would've still lost (30 - 50) = $20 minus the premium of the call. Would you have made up all these potential loss of $20 with premiums from writing these calls? Assume the premiums on these calls are $1, how many can you write before being able to cover the potential loss? And you can't write more than the number of shares you bought because otherwise you won't be covered. Imagine if the stock falls a huge amount instantly due to a bad earnings event or some extreme news, then the short call premiums won't protect you at all.

If you really want protection against adverse market moves against your long stocks, it's better to buy puts.