Newbie Question: Married Puts aka Covered Puts

[Investorsources]

Quote from FullyArticulate:

You've got to be one of the most defensive people I've seen post on ET. Several people calmly point out a mistake in your reasoning, and rather than admit your mistake and readjust your scenario to take it into account, you call them names and imply they're not "real men".

What would a phone call accomplish? You've said the "privileged few" can call you and discuss your strategy and you'll teach them. But you're unwilling to learn at the same time.

Listen, and you may be heard.

A phone call would do A LOT. Explanations become easier and innuendo is cut down tenfold.

And those with insults tend to fade away because they dont want to actually want to step to the plate and see what someone knows or doestn know.

All I know is that I will NEVER consider a synthetic call and a married put as having the same risk. Ive outlined why in my previous lengthy post. It went unnoticed and basically people didnt really want to understand it, so as jj said, Im not so much retreating, as I am giving up.

I concede, you all know better than me. Ill continue on my ways and be just as happy doing what I am doing, which coincidentally, is different than the current strategy we all were talking about.

And to think that I was one that would have talked about what Im currently doing. Its a great strategy and it makes a better return than this one, but far be it from me to ever discuss such strategy in such a forum and waste it on individuals that, not only dont care, but would rather try and find your loophole than perhaps embrace a strategy that actually makes some serious money, lol.

Its not a threat or a "what I have is so awesome, you guys just screwed yourselves with your attitude" type of bullshit, but its something that im sure some of you would have been intrigued by if for nothing else than the shear fact that it makes money.

But, again, its nothign to worry about, because based on responses Im probably not trading it properly anyway and I really dont know much about options either, lolol.

 

[Eliot Hosewater]

Actually, I was making the IRS comment kind of tongue-in-cheek.

It's funny, last week I had convinced myself that it was better to use the natural long call and write CCs against it for the very same reasons: you can earn 5% on the unspent portion plus you don't put that money at risk. Then I saw the married put example somewhere and somehow thought it was better, even knowing that the synthetic and natural are equivalent as far as the risk graph.

BTW, aren't there IRS rules about writing CCs that take the stock off the long-term capital gain clock? I think if you write ITM calls then you reset the clock, and it starts at zero if you don't get assigned.

 

[mysticman]

Quote from rallymode:
Here is a quick summary of this whole thread for the uninitiated to options....Synthetic long calendar spread.

You may be the only one who thinks that. Have you read all the posts? Maybe you should explain your reasoning to the uninitiated. The full position is stock + married April07 100 Puts + short Nov85 Calls.
Tell us why this position is synthetic long calendar rather than a synthetic short diagonal.

 

[mysticman]

Quote from Investorsources:All I know is that I will NEVER consider a synthetic call and a married put as having the same risk. Ive outlined why in my previous lengthy post. It went unnoticed and basically people didnt really want to understand it . . .

Yes that seems to be one of the issues that is creating some flames here. Essentially you are taking on the entire options world in admitting that the two positions are synthetic equivalents but somehow they do have not have the same risk. I looked closely at your previous post and only found the argument that the married put position costs less in time premium, but I think we have now shown that the married puts and the natural calls cost roughly the same once you add in the cost of carry.

You seem to speak from experience and there are some here who would really like to learn something new, so it is unfortunate that we cannot agree that stock + married put = synthetic call. If these two positions cost the same time premium, if they have the same risk graph, if they have the same results in an Excel simulation, then in what respect do you still believe that they are different?

Still, I have learned something from this discussion. It started when you talked about how many call deltas you can sell against the position. For simplicity sake let's use the natural April07 100 call, which would have the same deltas (.21) as the married put position. Now you would sell some of the Nov 85 calls with a delta of .22 against this position, and when you do that your position would essentially be delta neutral.
You don't use those words but it comes down to that, doesn't it?

So thank you for giving me an opportunity to think about delta neutral short diagonals.

 

[mysticman]

Quote from FullyArticulate: Ouch, and sadly a greek could have saved your argument: rho.

Isources saved by rho? You've got to be kidding, but maybe you are serious?:eek:

 

[momoneythansens]

Quote from Investorsources:
you buy the Jan 08 100 call at $6.60.

Long Jan 08 100 CALLS: $6.60

Quote from Investorsources:
This implies $2.30 in premium.

Long Jan 08 100 PUTS: $2.30

Quote from Investorsources:
In fact, I care just enough to tell you to go fck yourself.

Knowing when to admit you're wrong: Priceless.

There are some things money can't buy. For everything else there's Mastercard.

(Sorry, I couldn't resist )

 

[FullyArticulate]

Quote from Eliot Hosewater:

BTW, aren't there IRS rules about writing CCs that take the stock off the long-term capital gain clock? I think if you write ITM calls then you reset the clock, and it starts at zero if you don't get assigned.

This I did not know. A friend of mine has some stock he's kept for years as an unrealized gain (he doesn't elect mark-to-market). He writes calls against it and generally keeps the profit on expiration without affecting the tax status of the underlying. At the same time, he'll generally just buy back the calls at a loss if the stock rallies hard. He's obviously not writing ITM calls, as you described, so maybe the situation is different.

I'm no tax expert, and if the group has a hard enough time agreeing on put/call parity, I don't want to open the "tax code interpretation" thread which is sure to be filled with diametrically opposed positions which are all correct. In any case, something worth investigating.

 

[rallymode]

Quote from mysticman:

You may be the only one who thinks that. Have you read all the posts? Maybe you should explain your reasoning to the uninitiated. The full position is stock + married April07 100 Puts + short Nov85 Calls.
Tell us why this position is synthetic long calendar rather than a synthetic short diagonal.

You are right, its a diagonal. Didnt see the 85 strike. Must've missed it in all this typing. Though i still say its long and not short but i see how it can be seen as short if you focus on the short gamma in the front month. In any case, its the same worthless bet as described.

 

[cohenmichaela]

I understand you are just trying to share information with others. I also understand that you believe synthetic calls are more profitable than natural calls. In the latter you are incorrect. Others have pointed out the relationship with puts and calls (put/call parity). Even at the same strike calls will normally be trading higher than puts.

As others have mentioned, this is due to the cost to carry. The cost and risk of holding long stock plus long put is theoretically equivalent to holding a long call. I say theoretically because in practice the retail trader will pay the spread and commission which most assuredly would make the call cheaper than its synthetic.

Remember, put/call parity means that the price of a put, call, and underlying stock are all related. Volatility for a specific contract strike is the same between puts and calls therefore the price of a call and put at the same strike are directly relational. If a same strike call were actually more expensive than a put then I could simply sell the call then buy the put and buy the stock. This is known as a conversion. I have sold a call and bought a synthetic call. If a price disparity existed to make this a profitable trade I would do it all day long for risk-free (well not pin and early-exercise risk-free) profits. Unfortunately the retail trader is stuck with efficient (or semi-efficient) markets where these types of arbitrage do not exist

This is true regardless of whether you're selling front month calls against the position or not. Put/Call parity and synthetics allow a multi-leg position to be broken into components or synthetics. This is helpful in analyzing different aspects of risk that might not be apparent at first glance. Use real bid ask quotes (with commission costs) and check it out for yourself. You are paying more for a long call diagonal by using the synthetic long leg.

I know this is common knowledge and I'm not trying to be a smart ass to those who already know this. I'm simply reiterating this information because it appears you have beliefs that are contrary to these facts.

Quote from Investorsources:

A phone call would do A LOT. Explanations become easier and innuendo is cut down tenfold.

And those with insults tend to fade away because they dont want to actually want to step to the plate and see what someone knows or doestn know....

 

[Eliot Hosewater]

Quote from FullyArticulate:

This I did not know. A friend of mine has some stock he's kept for years as an unrealized gain (he doesn't elect mark-to-market). He writes calls against it and generally keeps the profit on expiration without affecting the tax status of the underlying. At the same time, he'll generally just buy back the calls at a loss if the stock rallies hard. He's obviously not writing ITM calls, as you described, so maybe the situation is different.

I'm no tax expert, and if the group has a hard enough time agreeing on put/call parity, I don't want to open the "tax code interpretation" thread which is sure to be filled with diametrically opposed positions which are all correct. In any case, something worth investigating.

Definitely investigate and for God's sake don't take my word for it. Actually I posed it as a question hoping someone in the know might respond.