selling puts equal buying the stock and selling a covered call
in each case the upside in terms of realized profit is limited, while the downside is unlimited, in terms of a drop in price of the underlying stock to zero, though obviously stocks seldom actually drop all the way to zero
selling a put is preferable to buying the stock and selling a covered call in terms of the capital required to make the trade, though the premium is generally lower with selling the put, as the spreads usually compensate for the cost of capital, based on the prevailing interest rates...as such, you can expect a lower return by about 0.5% a month at the current time, if you are selling puts rather than using covered calls
a person selling a put or making a covered call trade is essentially betting on the stock going nowhere or increasing slightly in price...if they thought the stock was going significantly higher, they would want to buy a call, and thereby control shares of the stock on the long side, with limited risk...if they thought the stock was going significantly lower, they would want to buy a put, and thus control shares of the stock on the short side, with limited risk |
