when you are writing a covered call, your downside risk comes from the stock declining more than the premium can offset. Since you are delta neutral on the stock, you can just sell the call and get assigned - or not. I don't understand how this isn't a "riskless" way to collect call premium
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Using index ETFs for delta
- Thread starter Eliot Hosewater
- Start date
Quote from yayt:
cvds, I don't understand
You are long:
Long etf, 100 delta
Long the short etf, "-100delta"
In effect you have 0 delta in theory ,
And then you write a call
Can you please explain again why that wouldn't work ?
The long and short ETFs offset each other, which means that you end up with a naked short call. How's that risk free?
repeat: Your call has delta! You are delta neutral BEFORE you write but not after.
you have got a lot's of things mixed up in your head. If you think in terms of delta it's easy to see you do care. This 'covered call' thinking doesn't really help you ... it's not a covered call.Quote from yayt:
Ok, I seem to be wrong but still don't completely understand why. When you write the call you receiv the premium, you don't care what the price does after that?
Quote from MTE:
The long and short ETFs offset each other, which means that you end up with a naked short call. How's that risk free?
Bingo, MTE nailed it head on. You're underlyings offset each other so all you've done is write a naked call. Your broker will look at that position and ask why you bothered with the underlyings and just margin you on the naked call.
Yes you keep the premium but you will lose money as the ETF rallies. The two ETF's offset each other.