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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: Dan Duchardt who wrote (1530)7/19/2001 12:56:54 PM
From: Mathemagician  Read Replies (2) of 5205
 
The comparable buy-write to the short 25 put is the long stock with a 25 call, since in both cases the maximum potential gain is realized for any closing price above $25. At today's closing prices of $37.64 on the stock, and $19.20 on the 2003JAN25, the net investment would be $1844, with a potential gain of $656 if called out. This is somewhat better than the short put, though to be complete in the comparison one should consider that the cash backing the put can collect interest. If you are getting more than about 3% on your $1920 you are better off with the short put. Assuming the stock stays above $25, which is clearly your hope, you also have fewer transaction fees with the short put that just expires worthless.

In order to be completely complete :) one should consider the tax implications of each, if you're trading in a taxable account.

If both expire, there is no difference.

If the short put is assigned, no tax is realized and the cost basis of the stock becomes strike-premium.

If the call is assigned things get complicated due to the constructive sale/offsetting position rules because this is a DITM call. Can anyone help us out here?

Further, we can safely assume that the expectation is that the put will expire and the call will be assigned since both strategies are neutral/bullish.

dM
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