Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Contrarian Investing -- Ignore unavailable to you. Want to Upgrade?

To: pcyhuang who wrote (390)	9/29/2006 5:33:01 PM
From: Carl Worth	Read Replies (2) \| Respond to of 4080

while it's true that shorting a put or writing a covered call on the same stock at the same strike price is essentially the same risk/reward situation, your other equation: Long Stock = long call + long put is not in fact equal if you are long stock XYZ at 20 bucks, and it drops 20%, you are down 20%, or 4 bucks if you are long a call and a put on stock XYZ at 20 bucks and the stock drops 20% to 16, your call will be essentially worthless, but your put will be worth over 4 bucks (including time value), so you will likely have a profit, unless the options were extremely expensive...you definitely won't be down 20%, as in the above example the farther the stock goes down, the more you make on the put, while the call just loses the amount you paid for it if the stock moves higher on the other hand, you achieve the full gain in share price if you are long the stock, whereas if you are long a call and a put, you participate in the gain due to the call, but the put loses value, and that along with declining time value of the options is a drag on your total gains one final point regarding covered calls vs. selling puts: on stocks that pay attractive dividends, the puts almost never compensate you for the dividends you will miss by being short a put instead of being long the stock and selling a call...as such, it is often preferable to own the stock and be short a call on such stocks to further develop the discussion, you can even arrange your trades so that you are long the stock during the months in which it goes ex dividend, and then short a put the rest of the time...with a broker like interactive brokers, where the commissions are a buck, you can do this without incurring much in the way of transaction costs, especially since you have to pay to open a new position each month as your calls expire, either to roll them forward, or to put on the next month's call, if the previous month is expiring worthless