Comments on: Puts with a dividend twist http://blog.poweropt.com/2006/02/17/puts-with-a-dividend-twist/ PowerOptions offers you the convenience and control required to automatically sort, filter, and analyze all 2,800+ optionable stocks and 180,000+ options online to find investments to meet your profit goals. Mon, 13 Oct 2008 12:42:27 +0000 http://wordpress.org/?v=2.0.1 by: Loren Gordon http://blog.poweropt.com/2006/02/17/puts-with-a-dividend-twist/#comment-10 Mon, 13 Mar 2006 08:30:12 +0000 http://blog.poweropt.com/2006/02/17/puts-with-a-dividend-twist/#comment-10 Well, yes. Comparing an ITM put to an ITM call is obviously going to give you a different risk/reward profile. So to duplicate the naked put strategy described in the article with a covered call strategry, you would simply sell the call at the same strike as the put. I guess I didn't mention the strike explicitly. The sold put is ITM, the sold call is OTM. So, case 1, the stock stays between breakeven and the strike. The naked put is assigned (because it was ITM). The sold call would expire worthless. The extra premium from selling the ITM put is gone because the purchase price at expiration is the strike, and the stock price at expiration is lower than the strike. In either case, you own the stock after expiration, and the effective purchase price should be very very close (neglecting some kind of arbitrage opportunity). Case 2, the stock rises above the strike. The naked put expires worthless, and the call is assigned. The difference in the premium between the ITM put and the OTM call is made up in the rise of the stock price (since it was purchased at a lower price at the same time the call was sold). Case 3, the stock falls below the breakeven. The put is assigned, and the call expires worthless. This is similar to the first case, but instead of making a little money, you have to take a loss or continue managing the position so that you can exit with a profit later on. Unless I simply am missing some understanding of how these options and the markets work, the two approaches are the same. I'm not trying to argue whether it's better to trade covered calls or naked puts; I'm saying that they are the same thing. -lcg Well, yes. Comparing an ITM put to an ITM call is obviously going to give you a different risk/reward profile. So to duplicate the naked put strategy described in the article with a covered call strategry, you would simply sell the call at the same strike as the put. I guess I didn’t mention the strike explicitly. The sold put is ITM, the sold call is OTM.

So, case 1, the stock stays between breakeven and the strike. The naked put is assigned (because it was ITM). The sold call would expire worthless. The extra premium from selling the ITM put is gone because the purchase price at expiration is the strike, and the stock price at expiration is lower than the strike. In either case, you own the stock after expiration, and the effective purchase price should be very very close (neglecting some kind of arbitrage opportunity).

Case 2, the stock rises above the strike. The naked put expires worthless, and the call is assigned. The difference in the premium between the ITM put and the OTM call is made up in the rise of the stock price (since it was purchased at a lower price at the same time the call was sold).

Case 3, the stock falls below the breakeven. The put is assigned, and the call expires worthless. This is similar to the first case, but instead of making a little money, you have to take a loss or continue managing the position so that you can exit with a profit later on.

Unless I simply am missing some understanding of how these options and the markets work, the two approaches are the same. I’m not trying to argue whether it’s better to trade covered calls or naked puts; I’m saying that they are the same thing.

-lcg

]]> by: Ernie Zerenner http://blog.poweropt.com/2006/02/17/puts-with-a-dividend-twist/#comment-5 Mon, 06 Mar 2006 16:34:19 +0000 http://blog.poweropt.com/2006/02/17/puts-with-a-dividend-twist/#comment-5 Hi Loren I understand your comment that the naked put strategy is essentially a covered call. However, these ITM cases of a call vs a put have some fundamental differences. If either a call or a put is written so they were ITM and both had the same time premium, they would have the same return if assigned. But that is where the comparison ends. If the stock goes up over the strike price of the put, it will not be assigned and the return will be very high because of the intrinsic value captured. The call will give the same return as if the stock price did not change. Just the opposite is the case if the stock declines. Therefore, the risk reward positioning is different between the two cases. The ITM call is positioned for downside protection and the ITM put is positioned for upside speculative gains. Hi Loren

I understand your comment that the naked put strategy is essentially a covered call. However, these ITM cases of a call vs a put have some fundamental differences. If either a call or a put is written so they were ITM and both had the same time premium, they would have the same return if assigned. But that is where the comparison ends. If the stock goes up over the strike price of the put, it will not be assigned and the return will be very high because of the intrinsic value captured. The call will give the same return as if the stock price did not change. Just the opposite is the case if the stock declines. Therefore, the risk reward positioning is different between the two cases. The ITM call is positioned for downside protection and the ITM put is positioned for upside speculative gains.

]]> by: Loren Gordon http://blog.poweropt.com/2006/02/17/puts-with-a-dividend-twist/#comment-3 Fri, 03 Mar 2006 17:14:07 +0000 http://blog.poweropt.com/2006/02/17/puts-with-a-dividend-twist/#comment-3 Interesting. Of course, selling a naked put *is*, for all intents and purposes, a covered call. Just look up the synthetics. So if you're selling an ITM put close to the market, you may as well buy the stock and sell the same call. There are probably margin requirement differences, but if the intent is to buy the stock at the put strike eventually, that's not much of an issue. In other words, the return would be the same, and you'd still capture the dividend, if you just started with the covered call instead of the put. -lcg Interesting. Of course, selling a naked put *is*, for all intents and purposes, a covered call. Just look up the synthetics. So if you’re selling an ITM put close to the market, you may as well buy the stock and sell the same call. There are probably margin requirement differences, but if the intent is to buy the stock at the put strike eventually, that’s not much of an issue.

In other words, the return would be the same, and you’d still capture the dividend, if you just started with the covered call instead of the put.

-lcg

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