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Strategies & Market Trends : The Covered Calls for Dummies Thread

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To: Dan Duchardt who wrote (2684)	10/14/2001 5:10:04 PM
From: Mathemagician	Read Replies (1) of 5205

I have not gone back to Roth to check the context of his remarks, but I do know from careful examination of covered call vs naked put strategies that the two are equivalent only in the case of cash secured puts. For uncovered put writing to be a "superior" strategy, it must not involve tying up the exercise price in cash, and in that case the truly naked put is a far more risky approach than the covered call. A covered call, or cash backed short put can never send you looking for "new" money to cover your loss in the position. A naked put can send you scrambling for money you might not have to cover the assignment. Does that apply equally to ATM, ITM and OTM? Margin-bought underlying for CC vs. margin-backed put? The risk in the case you cite is not due to the use of puts vs. calls, but margin vs. cash. The same discussion could be had in the context of outright stock ownership. I find the Roth statement you quote here to be misleading and even contradictory if you take "very similar to" as meaning some sort of equivalence. You cannot have both the equivalence and the superior reward/payoff of the naked put. We agree that Roth can be misleading and is definitely contradictory. Even still, "equivalent" and "very similar" are very similar. "Equivalent" and "the same" are the same. :) I do not think he attempts to claim both equivalence and superiority. Definitely subject to interpretation, though. This is a complex issue and we may be well served to break it down into several cases and supply ample real-life examples. You first! :) dM@feelinglazytoday.com P.S. Roth does make his remarks in the context of margin use, FWIW.

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