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Strategies & Market Trends : BEFRIEND THE TREND Short-term Options Trading Thread
QQQ 623.42+0.9%Jan 6 4:00 PM EST
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To: Nancy who wrote (841)2/15/2002 1:13:37 AM
From: Dan Duchardt  Read Replies (3) of 4058
 
Nancy,

To sell a covered call, you have to buy the stock in the first place. If the stock price drops, you lose just as much on the CC position as you would lose buying the stock if it is put to you. If you are called out on the CC, the most you can make is the same as the premium you could have collected from selling the naked put. Neglecting an effect of "risk free interest" the time premiums are the same for calls and puts at the same strike. The risk-reward profile of the naked put turns out to be the same as a "buy-write" CC entered at the same time. A naked put can generally be carried at lower cost because the margin requirements are lower, but it is prudent to reserve sufficient cash to buy if the stock is put to you. When this reserve cash and the interest it can collect are included in the mix, the naked put and CC at the same strike are identical.

Dan
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