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Strategies & Market Trends : How To Write Covered Calls - An Ongoing Real Case Study!
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To: Herm who wrote (5628)10/26/1997 9:00:00 PM
From: Carl H. Gotsch  Read Replies (1) of 14162
 
Herm,

It appears that several of us are studying McMillan on options. In his recent book of the same name, after discussing covered call writing and other options strategies, he makes the following comment (p. 65):

"Recall that when two strategies' profit graphs have the same shape--as do covered call writing and naked put selling--then the two strategies are considered to be equivalent.

I generally prefer naked put selling for two reasons: first, you are only dealing with one security's bid-asked spread rather than two, and second, the margin requiremnt is considerably smaller. The stock owner receives dividends (if any are paid), but the naked put seller can use T-bills as his collateral and earn interest that way. Moreover, the price of the put has the dividend factored in (i.e., puts are more expensive on high-divident-paying stocks, all other things being equal.)"

Could you or any one else on the thread explain his preference? (I understand the "equivalent" part.)When you talk about covered call writing as a strategy, do you assume that the investor already owns the stock or is the purchase of the option and the underlying part of an overall strategy?

Thanks, as always, for your help.

--Carl
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