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Strategies & Market Trends : The Covered Calls for Dummies Thread
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To: Mathemagician who wrote (2685)10/14/2001 6:17:06 PM
From: Dan Duchardt  Read Replies (1) of 5205
 
dM,

Does that apply equally to ATM, ITM and OTM? Margin-bought underlying for CC vs. margin-backed put?

It does not matter if it's ATM, ITM or OTM. Neglecting the risk free interest, the pricing models include the same time premium for calls and puts at the same strike price. If you set the interest to zero, the gain-loss curves for a short put are exactly the same as the curves for a cCC at any strike price. If you put the interest in, the curve for the CC raises a bit above that of the short put, but in theory you should be able to invest the cash you did not lay out for the short put at the risk free interest rate and exactly make up that difference.

Margin always makes a difference. If your CCs are written against margined stock, then you have the usual amplification of the long side profit or loss. With margined stock you can lose more than what it cost you to enter the CC. And of course with the truly naked put the margin requirement is generally a lot less than for the CC, so you can make an even greater % gain or loss.

The true equivalence of the two positions is a fully paid long stock position for the covered call, and a cash packed short put at the same strike as that call. You can then dabble with comparisons like 50% margined stock for the CC and a 50% cash backed short put that should also be about equivalent when you factor in the margin interest.

Dan
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