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Strategies & Market Trends : Options 201: Beyond Obi-Wan-Kenobe
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To: tyc:> who wrote (689)9/23/2002 11:07:13 AM
From: Dan Duchardt  Read Replies (1) of 1064
 
Do you agree that positions that have the same (future) profit profile, have the same (de-facto) present value ?

I think not, but that might depend on how you define your positions. For example, move on to the next question

do you agree that the value of a short put is the same as a covered call, both having the same strike ?

Based on theoretical pricing models, the profit/loss curve for a short put is identical to that of the covered call at the same strike, neglecting differences of risk free interest rates. So if you are looking at the absolute amount of money made or lost on a trade, the positions are equivalent. However, the carrying costs are not the same. A covered call with a fully paid underlying stock is equivalent to a short put backed by sufficient cash to purchase the underlying if assigned. If you are receiving interest on this cash at the rate used in the pricing models, these two positions are truly equivalent.

If you purchase the underlying on margin you typically can carry the long underlying of the CC for 25% to 30% maintenance margin, but can carry a naked short put for premium received plus 20% of the underlying, so the carrying cost of the short put is somewhat less than for the CC.
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