Writing Covered Calls on a Married Put?

[MalCo]

Hi guys! I am new to this board and relatively new to options trading. I have a trade idea but I do not know if it is possible. I would love to read your feedback!

I would like to buy a stock with cash that has an annual dividend yield that covers the cost of a 1 year put (slightly otm). I then want to write weekly, or longer, covered calls on the underlying stock (depending on the situation). If the underlying stock gets assigned, what happens to the long put? If I buy back the shares in open market, rinse and repeat, will my long put protect these new shares?

If the last sentence is true, it seems like it does not matter if I write slightly otm covered calls at lower strike prices than my original cost basis. Since my long put is higher than the new shares I purchase at the lower price, wouldn't I still benefit from the right to sell the shares at the higher strike price via the long put? And if the opposite occurs and there is a bull run, wouldn't I benefit from having the protective put in the event of a market crash?

Am I seeing this the right way? In practice does it actually work this way? Or am I way off? I understand there are position management considerations, nuances, etc. I'm wondering if this could work in theory?

Thx for the input!

 

[fyretrading]

tl;dr markets are efficient and its all priced in

 

[Robert Morse]

If the underlying stock gets assigned, what happens to the long put?

You are left long the put.

IMO, this is a very complicated way to use a lot of margin and have the opportunity to make very little money. The married put is a synthetic call. Then you are selling a near term call against that. Why do you like that better than just buying the call that you synthetically want to own and then sell the options you choose to and just have a simple call calendar that you can roll? This would incur less margin, lower fees and similar risk reward. All you would miss is the dividend if any. As 1 year T-bills are over 2% now and most dividends are not much over 3%, I do not see the advantage of your plan.

Bob

 

[cdcaveman]

I thought that was called a risk reversal

 

[Robert Morse]

I thought that was called a risk reversal

A typical risk reversal would be a hedge for a stock that might look like:

Long stock at 100
Buy 80 put, sell 120 call.

Married put is:
Long stock
Long Put

 

[Lee-]

Hi guys! I am new to this board and relatively new to options trading. I have a trade idea but I do not know if it is possible. I would love to read your feedback!

I would like to buy a stock with cash that has an annual dividend yield that covers the cost of a 1 year put (slightly otm). I then want to write weekly, or longer, covered calls on the underlying stock (depending on the situation). If the underlying stock gets assigned, what happens to the long put? If I buy back the shares in open market, rinse and repeat, will my long put protect these new shares?

If the last sentence is true, it seems like it does not matter if I write slightly otm covered calls at lower strike prices than my original cost basis. Since my long put is higher than the new shares I purchase at the lower price, wouldn't I still benefit from the right to sell the shares at the higher strike price via the long put? And if the opposite occurs and there is a bull run, wouldn't I benefit from having the protective put in the event of a market crash?

Am I seeing this the right way? In practice does it actually work this way? Or am I way off? I understand there are position management considerations, nuances, etc. I'm wondering if this could work in theory?

Thx for the input!

There's a few caveats I can think of, but because it appears your primary motive is collecting the dividend (at lowest risk possible), I'd like to point out 2 items that are related to the dividend.

1) you may get assigned on the call and lose the stock, thus forfeit the dividend. the chance of this occurring of course could be reduced by not selling options when extrinsic is less than the dividend and particularly for the expiration happening the week of the ex-div.

2) if you get assigned frequently (you did say selling slightly OTM), then it's conceivable that you will not have held the stock long enough for the dividend to be considered a qualified dividend, which means you'll get the short term capital gains rate instead of the long terms capital gains rate. I don't know a lot about long term tax rules, so I'm not sure if the qualified dividend requirements are based on trade dates or settlement dates. Anyway this probably won't be an issue if you buy back as soon as you notice you're assigned even if you get assigned weekly.

As far as your long put, that should be considered a separate position, so getting assigned and buying new shares shouldn't matter, but I'd not expect your broker to touch the put unless it was part of a forced liquidation or your broker has some sort of auto exercise when assigned feature.