Long Call vs. Naked Short Put

[squarepush3r]

if you are bullish on an option, you have 2 options i see.

1) Long Call (deducted from cash, no margin requirements)
2) Short Naked Put (credited to cash, margin requirement 100% + 20% value)


so, if I am correct, is there a slight advantage to buying Long Calls over option 2, since with option 2 you have the additional 20% margin requirements, so it will cost about %120 of the value total cost.


Am I seeing this correct? Why would someone naked short put if this is the case?

 

[MTE]

You can't really compare the two as they have completely different profiles, and serve different purposes.

 

[commiebat]

Long calls and naked puts are the yin and yang of stock ownership.

Naked puts profit over a wider range of stock prices, which somewhat makes up for their capped return particularly if you're not the world's best stock picker.

 

[squarepush3r]

Quote from commiebat:

Long calls and naked puts are the yin and yang of stock ownership.

Naked puts profit over a wider range of stock prices, which somewhat makes up for their capped return particularly if you're not the world's best stock picker.

nice tip, that makes good sense. I think if im truly bullish ill go CALLS for my situation

 

[commiebat]

Quote from squarepush3r:

I think if im truly bullish ill go CALLS for my situation

On the other hand, if you're not-bearish, naked puts are a better investment.

Either way, threat number one is bears.

 

[gobar]

can we short call/put options?

So many call and put are overvalued and they goes to zero by expiration date...

 

[El OchoCinco]

Quote from gobar:

can we short call/put options?

So many call and put are overvalued and they goes to zero by expiration date...

And so many are way ITM by expiration date as well, it works both ways.

What basis are you relying on to determine that the calls or puts are overvalued?

 

[squarepush3r]

absolutely, its the same things as 'writing a call/put'


the charts are a little reversed, limited gain, and most possible loss

 

[spindr0]

You are mixing and matching two concepts and that's very confuzzling. They need to be looked at separately.

Why would someone naked short put instead of buying a call? Because the two strategies have very different risk/reward characteristics. Theoretically, the debit call has a limited loss and an unlimited profit. It only makes money if the stock rises (and a small rise can even mean a loss). The short put has a limited profit and an significant loss potential (the strike less premium received).

But you based your question on the margin cost of each position, not the strategic decision of whether you're bullish, bearish or neutral which is why you select a strategy.

Yes, long calls must be paid for in full. (deducted from cash, no margin requirements). However, the following statement is incorrect:

"There a slight advantage to buying Long Calls over option 2, since with option 2 you have the additional 20% margin requirements, so it will cost about %120 of the value total cost. (margin requirement 100% + 20% value)"

The margin requirement for a naked put is:

- 100% of option proceeds, plus 20% of underlying security value less out-of-the-money amount, if any minimum requirement is option proceeds plus 10% of the put’s aggregate exercise price (number of contracts x exercise price x $100)

- proceeds received from sale of puts(s) may be applied to the initial margin requirement

For an OTM naked put, that means that the margin requirement is 20% not 120%

 

[squarepush3r]

Quote from spindr0:

You are mixing and matching two concepts and that's very confuzzling. They need to be looked at separately.

Why would someone naked short put instead of buying a call? Because the two strategies have very different risk/reward characteristics. Theoretically, the debit call has a limited loss and an unlimited profit. It only makes money if the stock rises (and a small rise can even mean a loss). The short put has a limited profit and an significant loss potential (the strike less premium received).

But you based your question on the margin cost of each position, not the strategic decision of whether you're bullish, bearish or neutral which is why you select a strategy.

Yes, long calls must be paid for in full. (deducted from cash, no margin requirements). However, the following statement is incorrect:

"There a slight advantage to buying Long Calls over option 2, since with option 2 you have the additional 20% margin requirements, so it will cost about %120 of the value total cost. (margin requirement 100% + 20% value)"

The margin requirement for a naked put is:

- 100% of option proceeds, plus 20% of underlying security value less out-of-the-money amount, if any minimum requirement is option proceeds plus 10% of the put’s aggregate exercise price (number of contracts x exercise price x $100)

- proceeds received from sale of puts(s) may be applied to the initial margin requirement

For an OTM naked put, that means that the margin requirement is 20% not 120%

thanks for the reply spindr0, I may be confused on something then.

If I am truly bullish, could I sell PUTS to increase my cash availability to buy more CALLS? My previous thinking was that money had to be used for both pretty similarly, so it was a pick or choose decision based on your confidence.