Straddle (sort of) question

[nravo]

Let's say I buy the ES futures an sell an ATM call, near month -- capping my downside risk with a stop equal to the amount of premium collected. Simple, not fool proof, of course. Sudden gaps, sharp rebounds after being stopped. But a fairly ordinary covered call.

Now, at the same time, let's do the reverse in an IRA account. Let's sell an ES futures contract and write an ATM ES put, placing a stop on ES about equal to what the premium collected is.

Question1: Is this a tax issue, as in a tax-straddle. I think not because it's set up as a hedge not as a tax evasion, as I would gain or lose on either position. I could easily have a taxable gain and a loss I can't take.

Question 2: Is there a more efficient way to have the same risk reward as the above two trades?

Cheers,

NR

 

[El OchoCinco]

Quote from nravo:

Let's say I buy the ES futures an sell an ATM call, near month -- capping my downside risk with a stop equal to the amount of premium collected. Simple, not fool proof, of course. Sudden gaps, sharp rebounds after being stopped. But a fairly ordinary covered call.

Now, at the same time, let's do the reverse in an IRA account. Let's sell an ES futures contract and write an ATM ES put, placing a stop on ES about equal to what the premium collected is.

Question1: Is this a tax issue, as in a tax-straddle. I think not because it's set up as a hedge not as a tax evasion, as I would gain or lose on either position. I could easily have a taxable gain and a loss I can't take.

Question 2: Is there a more efficient way to have the same risk reward as the above two trades?

Cheers,

NR

Before answering, you need to confirm whether you can even sell futures short in an IRA account.

 

[nravo]

Quote from optioncoach:

Before answering, you need to confirm whether you can even sell futures short in an IRA account.

I can. IB allows it, as do some others.

 

[RICKTHESTICK]

Quote from nravo:

Let's say I buy the ES futures an sell an ATM call, near month -- capping my downside risk with a stop equal to the amount of premium collected. Simple, not fool proof, of course. Sudden gaps, sharp rebounds after being stopped. But a fairly ordinary covered call.

Now, at the same time, let's do the reverse in an IRA account. Let's sell an ES futures contract and write an ATM ES put, placing a stop on ES about equal to what the premium collected is.

Question1: Is this a tax issue, as in a tax-straddle. I think not because it's set up as a hedge not as a tax evasion, as I would gain or lose on either position. I could easily have a taxable gain and a loss I can't take.

Question 2: Is there a more efficient way to have the same risk reward as the above two trades?

Cheers,

NR

I am not from the states, but the answer to question 2 is
_ first case you are short put
- 2 case you are short call

 

[nravo]

In case one, the maximum profit is the ATM call premium sold. How is that the equivalent to a short put, where the maximum profit would be the (presumably higher) ATM put premium sold.

 

[rosy2]

Quote from nravo:

In case one, the maximum profit is the ATM call premium sold. How is that the equivalent to a short put, where the maximum profit would be the (presumably higher) ATM put premium sold.

"Let's say I buy the ES futures an sell an ATM call"

this is a synthetic short put. need to take into account dividens and interest rate

 

[nravo]

Quote from rosy2:

"Let's say I buy the ES futures an sell an ATM call"

this is a synthetic short put. need to take into account dividens and interest rate

Isn't my risk greater with a short put, as I have volatility risk. A put could, while falling downward, spike higher than falling future, no?

 

[RichardRimes]

Quote from nravo:

Isn't my risk greater with a short put, as I have volatility risk. A put could, while falling downward, spike higher than falling future, no?

Your absolutely right as ES is not affected by vols. We had quite a bit of discussion (on spx creditspread thread) and I actually did use ES (or try to) hedge some short put spreads. Consensus was ES isn't the best hedge. You could probably solve for the volatility risk but tough to predict future volatility. And in some ways your still at vol risk with the short call as IV affects theta...so if IV is low when you sell the call your premium won't be as good as if IV is higher.

 

[nravo]

So why is a covered call considered a synthetic short put, if the risk profiles are different? My downside risk on a covered call is either opportunity cost or the underlying going to zero. My downside risk on a short put is theoretically unlimited, as it is uncovered, and volatility is uncapped. I'm having a hard time imaging a scenario where I would want to write a naked put instead of a covered call. Someone enlighten me.

 

[El OchoCinco]

Quote from nravo:

So why is a covered call considered a synthetic short put, if the risk profiles are different? My downside risk on a covered call is either opportunity cost or the underlying going to zero. My downside risk on a short put is theoretically unlimited, as it is uncovered, and volatility is uncapped. I'm having a hard time imaging a scenario where I would want to write a naked put instead of a covered call. Someone enlighten me.

Downside risk on a short put is not theoretically unlimited. Just like you said with the stock, the underlying can only go to zero. The max risk of a covered call and short put are the same. Volatility can go to 400% but a short put can never be worth more than Strike - $0.