How much do you have to know?

Free Thinker · Mar 28, 2011

Quote from filter_sweep:

As mentioned by others, a covered call is the synthetic equivalent of a short naked put, and has the same risk/reward profile. The fact that the stock pays a dividend makes no differenceâ¦ itâs priced into the cost of the put you are synthetically selling. If it were not so you could get free money by arbitraging between the covered call and the put, and all the free money is already arbed out of the market.

Selling naked puts that are fully secured by cash is a good strategy for grinding markets, particularly if you can manage to sell them on pullbacks. However, as mentioned, you will significantly underperform during wild bull runs and you can expect significant drawdownâs during bear markets.

Itâs funny, I remember covered calls and selling verticals/iron condors was all the rage back in â04 through early â07, as though everyone had forgotten what happened in 2000-2002. Anyone blindly employing those strategies during â08 and â09 would have been murdered, giving back everything they had made during the good years and then some. Here we are a couple years later and everyone has a short memoryâ¦ everyoneâs talking about selling premium again. Itâs amazing how quickly we forget and forgiveâ¦ even Spitzer has his own TV show now, crazy world we live in!

long before that. wade cook.

The Big D · Mar 28, 2011

Quote from filter_sweep:

As mentioned by others, a covered call is the synthetic equivalent of a short naked put, and has the same risk/reward profile. The fact that the stock pays a dividend makes no differenceâ¦

It makes all the difference in the world under circumstances where you hold the underlying but NOT the call. Because then the positions are not analogous. And that's a frequent situation in most covered-call writing strategies when the price drops - because you only write calls at a strike where you no longer have adequate margin of safety and want out. If no one's willing to pay you for that call (because the price is currently too low), you don't write a call and are just happily long and collect dividends.

All too frequently option math weenies miss the forest for the trees.

Free Thinker · Mar 28, 2011

Quote from The Big D:

It makes all the difference in the world under circumstances where you hold the underlying but NOT the call. Because then the positions are not analogous. And that's a frequent situation in most covered-call writing strategies when the price drops - because you only write calls at a strike where you no longer have adequate margin of safety and want out. If no one's willing to pay you for that call (because the price is currently too low), you don't write a call and are just happily long and collect dividends.

All too frequently option math weenies miss the forest for the trees.

and sometimes covered call sellers delude themselves into thinking its safer than selling puts.

The Big D · Mar 28, 2011

Quote from filter_sweep:
Itâs funny, I remember covered calls and selling verticals/iron condors was all the rage back in â04 through early â07, as though everyone had forgotten what happened in 2000-2002. Anyone blindly employing those strategies during â08 and â09 would have been murdered, giving back everything they had made during the good years and then some. Here we are a couple years later and everyone has a short memoryâ¦ everyoneâs talking about selling premium again.

Uh, what? Most of the consistent dividend stocks were comparatively resilient in 08-09. I think the covered call/dividend portfolio I helped my dad set up lost about 20% on paper, and no intrinsic value whatsoever (ie. no dividends were passed). The paper value was back 6 months later. Layer on top of that a decade of selling calls, and your argument that there was some sort of lesson to be learned doesn't make much sense.

The Big D · Mar 28, 2011

Quote from Free Thinker:

and sometimes covered call sellers delude themselves into thinking its safer than selling puts.

The point is, it's DIFFERENT than selling puts when done the way most people do it. They're not the same position. The safety in either case is dependent on the underlying, but pretending to equate them is option idiocy.

atticus · Mar 28, 2011

Quote from The Big D:

The point is, it's DIFFERENT than selling puts when done the way most people do it. They're not the same position. The safety in either case is dependent on the underlying, but pretending to equate them is option idiocy.

The difference lies in preferentially holding stock for periods in which you don't write calls, and writing calls against a pre-existing share-position. If traded independently it's simply nonsense to choose the CC unless you're taking a large bet on rates.

The Big D · Mar 29, 2011

Quote from atticus:

The difference lies in preferentially holding stock for periods in which you don't write calls, and writing calls against a pre-existing share-position. If traded independently it's simply nonsense to choose the CC unless you're taking a large bet on rates.

This has nothing to do with rates (or very little). More ridiculous options nonsense.

Since we were talking about the 2008-2009 timeframe, here's an example covered call trade from that period. Feel free to explain how 1 or more short puts would be equivalent

Trade #1: Buy LLY @ 30.00 the week of Oct 10 via limit order (margin of safety says maximum holding price is $36)
( receive $0.47 dividend week of Oct 14 )
Trade #2: Write covered call, JAN09, strike $36, week of Dec. 12 (collecting maybe 0.50 of premium, not that it matters for this example)
(called out of position at JAN expiration)

Net result: $6 of stock profit, $0.47 of dividends, $0.50 of premium, position flat.

Now, care to replicate that with only short puts? If anyone tries to use the underlying or a long call, I'll just laugh in their face

Free Thinker · Mar 29, 2011

Quote from The Big D:

This has nothing to do with rates (or very little). More ridiculous options nonsense.

Since we were talking about the 2008-2009 timeframe, here's an example covered call trade from that period. Feel free to explain how 1 or more short puts would be equivalent

Trade #1: Buy LLY @ 30.00 the week of Oct 10 via limit order (margin of safety says maximum holding price is $36)
( receive $0.47 dividend week of Oct 14 )
Trade #2: Write covered call, JAN09, strike $36, week of Dec. 12 (collecting maybe 0.50 of premium, not that it matters for this example)
(called out of position at JAN expiration)

Net result: $6 of stock profit, $0.47 of dividends, $0.50 of premium, position flat.

Now, care to replicate that with only short puts? If anyone tries to use the underlying or a long call, I'll just laugh in their face

you sell a lly jan 36 put and recieve the $6 stock appreciation plus the premium up front.

JJacksET4 · Mar 29, 2011

Quote from The Big D:

Net result: $6 of stock profit, $0.47 of dividends, $0.50 of premium, position flat.

Now, care to replicate that with only short puts? If anyone tries to use the underlying or a long call, I'll just laugh in their face

Dude, like FreeThinker mentions, sell the 36 strike put - you would have received for example $700 up front - the stock moves to 36 and it expires worthless and you get the $700 - just like the CC writer.

It's really not that hard and nothing to laugh at!

JJacksET4

spindr0 · Mar 29, 2011

Quote from The Big D:

Since we were talking about the 2008-2009 timeframe, here's an example covered call trade from that period. Feel free to explain how 1 or more short puts would be equivalent

Trade #1: Buy LLY @ 30.00 the week of Oct 10 via limit order (margin of safety says maximum holding price is $36)
( receive $0.47 dividend week of Oct 14 )
Trade #2: Write covered call, JAN09, strike $36, week of Dec. 12 (collecting maybe 0.50 of premium, not that it matters for this example)
(called out of position at JAN expiration)

Net result: $6 of stock profit, $0.47 of dividends, $0.50 of premium, position flat.

Now, care to replicate that with only short puts? If anyone tries to use the underlying or a long call, I'll just laugh in their face

You can substitute a deep ITM call for the stock (all intinsic) making it a legged in vertical.

You can also substitute a deep ITM naked put for the long stock but I wouldn't recommend it because of the call write being uncovered (stock rises above put strike and naked call goes ITM). Dividend will be priced into the put. Pretty much the same result but via a less desireable approach.