Covered Call
We all know that the term, Covered Call, implies a position consisting of Stocks and Short Call options...
example: 100 shares of AAPL (Apple) at $196.40 and 1 contract of Short AAPL Jan $210 Call (whose premium today stands at $2.15)...
The 2 primary reasons for having such a WRITE Buy are :
a) Income generation from the premium collected for selling the Short Call option
b) Cushioning price decline
this position roughly requires a capital outlay of $19,425 (100 x $196.40 - 100 x $2.15)...
Max Profits = $1575 (trust me here)
Max Losses = $19,425 (if AAPL bankrupts and price zooms to $0)
now...consider the following alternative :
naked 4 x Short AAPL Jan 195 Put ...whose premium is currently $350 per contract
this position requires margin of ~ $15,600 to be set aside
a) Max Profits = $1400 ( 300 x $3.50)
b) Max Losses = $78, 000 (400 x $195) >> (if AAPL bankrupts and price zooms to $0)
now, if AAPL does indeed collapse and stock value goes to $0... i guess, i would throw in the towel and admit, i am not cut out for this business... ie, this scenario is remote...not impossible...but very slim chance...
this said, look at the 2 trades... would you not say, they are about similar.... they both have limited profit potential and very large potential losses..
QUIZ :
so, why would anyone be interested to purchase Covered Call vs Naked Short Put, given that they 2 are synthetically similar (they are...trust me)....
assumption : NOT a dividend paying Stock...
We all know that the term, Covered Call, implies a position consisting of Stocks and Short Call options...
example: 100 shares of AAPL (Apple) at $196.40 and 1 contract of Short AAPL Jan $210 Call (whose premium today stands at $2.15)...
The 2 primary reasons for having such a WRITE Buy are :
a) Income generation from the premium collected for selling the Short Call option
b) Cushioning price decline
this position roughly requires a capital outlay of $19,425 (100 x $196.40 - 100 x $2.15)...
Max Profits = $1575 (trust me here)
Max Losses = $19,425 (if AAPL bankrupts and price zooms to $0)
now...consider the following alternative :
naked 4 x Short AAPL Jan 195 Put ...whose premium is currently $350 per contract
this position requires margin of ~ $15,600 to be set aside
a) Max Profits = $1400 ( 300 x $3.50)
b) Max Losses = $78, 000 (400 x $195) >> (if AAPL bankrupts and price zooms to $0)
now, if AAPL does indeed collapse and stock value goes to $0... i guess, i would throw in the towel and admit, i am not cut out for this business... ie, this scenario is remote...not impossible...but very slim chance...
this said, look at the 2 trades... would you not say, they are about similar.... they both have limited profit potential and very large potential losses..
QUIZ :
so, why would anyone be interested to purchase Covered Call vs Naked Short Put, given that they 2 are synthetically similar (they are...trust me)....
assumption : NOT a dividend paying Stock...
1 comment:
Yes they are synthetically similar however only if one assumes the trader holds on till expiration. If one enters a covered call and say in three days closes the short call to be long stock this is not the same as a short put because if you close the short put you are not in the market (cf long stock in the covered call)
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