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Strategies & Market Trends : ThE WoNdErFuL wOrLd Of OpTiOnS
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To: RBane who wrote (269)2/17/1997 7:42:00 PM
From: Madpinto   of 308
 
As I have said in the past, selling a put and writing a covered call on stock parallel each other in most ways. A couple of differences between the two need to be mentioned. First, holders of the stock receive any dividends paid out between the present and expiration. These dividends will usually be built into the price of the options but will not include any increased or special dividends. On the other hand , the short put position would work better if the company unexpectedly cut or eliminated the dividend. In addition, another factor needs consideration. Short puts may get assigned before expiration. You must have the funds available to buy the stock if this happens. A long put holder may exercise the put prematurely if the interest to expiration on the short stock surpasses the cost of the corresponding call. The put holder can buy the same strike call and collect interest on the short stock keeping the position essentially the same while optimizing profits. The only other situation I can think of involves a takeover stock with a back end deal.
A back end deal has partial payment in cash and the rest in securities. Short puts do poorly under this scenario, but I will save this discussion for another time. Mike
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