ITM Covered Call vs. Naked Put

[daytrader85]

Is there any advantage to either one? They both provide the same risk profile and margin, right?

The only reason I can think to a sell a ITM Covered Call would be if the stock paid dividends, or if it was in an IRA.

Are there any other reason?

Thanks.

 

[MTE]

Dividends are priced into options so there's no advantage in one vs. the other. In fact, a ITM call is likely to be assigned on the day before ex-div in which case you would end up paying extra commissions/exercise fees.

Some brokers, as discussed in another thread, allow naked puts in IRA accounts.

Commissions, no matter how small, are still double on the covered call, so unless you already own the stock there's no point in buying it to write covered calls. Also, an OTM put is likely to have better liquidity and a tighter bid/ask spread than an ITM call.

 

[spindr0]

With the NP, you have up to 2 fewer commissions (2 if it expires, 1 if you have to close it). Plus, you don't have to fight 2 B/A spreads going in and out (stock and call) and if your platform doesn't provide a synthetic put order feature, the CC will require you to leg out if you need to close it.

NP is waaaay better. Just don't bite off more of em than you can swallow

 

[daytrader85]

But, aren't ITM CC's better for adjustments?

If the underlying does go down, you can always take the profit on the calls and just sell another ITM call.

 

[wayneL]

Quote from daytrader85:

But, aren't ITM CC's better for adjustments?

If the underlying does go down, you can always take the profit on the calls and just sell another ITM call.

Same difference, just roll the put from/and to the same strikes.

 

[asap]

correct, always use the naked put.

also, you can at a later stage buy a lower strike put and thus convert the naked put into a riskless synthetic collar.

 

[exQQQQseme]

asap, I understand the "synthetic collar" part of your statement, but am having a difficult time envisioning a "riskless" situation. If you have a few minutes, I would greatly appreciate an example.

Thanks in advance.

Bob

 

[asap]

sure

here is an hypothetical example.

sell to open 1 SPY 140 JAN08 put for 8.00 credit.

then when the SPY moves up 1 point or so you convert your naked put into a riskless collar by:

buy to open 1 SPY 138 JAN08 put for 6.00 debit.

the resulting position has a potential gain of 2.00 and a risk of 0 (8.00-6.00-2.00)=0

hope this helps

 

[Don87109]

Quote from asap:

correct, always use the naked put.

also, you can at a later stage buy a lower strike put and thus convert the naked put into a riskless synthetic collar.

I don't think always using a NP is good rule of thumb.

For example, one of my brokers OptionsXpress pays minimal interest on the cash securing a naked put in an IRA. Therefore it usually makes more sense to use a CC.

It's best to do the math both ways (CC & NP) to see the difference. When trading a high value underlying like SPY in an OE IRA the lost interest for say 10 NP's can be $400-$500 in a month.

Don

 

[MTE]

Quote from Don87109:

I don't think always using a NP is good rule of thumb.

For example, one of my brokers OptionsXpress pays minimal interest on the cash securing a naked put in an IRA. Therefore it usually makes more sense to use a CC.

It's best to do the math both ways (CC & NP) to see the difference. When trading a high value underlying like SPY in an OE IRA the lost interest for say 10 NP's can be $400-$500 in a month.

Don

And how do you get interest from holding the long stock? Sure, you get dividends, but those are priced into options.