Covered Call vs. Naked Put

[Ardyne]

For those newish to options....

I read so much how selling naked puts are a very dangerous game to play but not so much about buying covered calls.

For all those not sure what I mean , do a risk profile graph on each for a stock and see.

 

[emilov]

Re: Covered Call vs Naked Put

Hey Ardyne,
Both buying calls and selling puts are a bullish strategy. The reason why people associate more risk with selling puts is because of the unlimited risk.

If you buy calls and the stock tanks, all that you lose is the premium paid for the bought calls (i.e. maximum loss is 100%).

When you sell puts you offer to buy stock at a certain price. If the price of the stock falls this means that you have to buy at a higher price (obligation from the sold put) and, if you don't want or can't afford the stock, sell it at a lower price. The lower the price the higher the loss: open ended risk.

Of course, if your goal is to buy the stock in the first place (that is you have the funds) then selling a put first and generating some cash is a great idea. If you don't get exercised you just sell more puts next month till you end up with the stock (which is when you start selling covered calls, but that is a different topic).

Cheers, Emil

 

[Ardyne]

Re: Covered Call vs Naked Put

sorry I meant sell covered call.

buy stock at $10.00
sell call for $3000
if stock goes to $0 then lose $7000.


sell put for $3000 on $10.00 stock

at $0 yhe loss is $7000

oops

 

[emilov]

Re: Covered Call vs Naked Put

These are worst case scenarios. Ideally, you will have taken action way before that. It depends how far out of the money your sold options are.

There are different things you can do, roll out (and up) etc. It all comes to your knowledge of possible twists of the strategies used and, of course, to your discipline to execute.

 

[Ardyne]

Re: Covered Call vs Naked Put

I don't disagree with what your saying. but if I plot risk graphs of them both they are almost identical. maybe i'm wrong .

who would be in a better position. a bnb naked put atm sold at $10.00 or the guy who buys 1000 shares at $10.00 and sells a $10.00 call.

I don't see any major differences in the risk

 

[cutz]

Re: Covered Call vs Naked Put

You're 100% correct Ardyne,

Naked put = Buy stock & write call (AKA Buy write/Covered Call)

 

[jackson8]

Re: Covered Call vs Naked Put

I don't disagree with what your saying. but if I plot risk graphs of them both they are almost identical. maybe i'm wrong .

who would be in a better position. a bnb naked put atm sold at $10.00 or the guy who buys 1000 shares at $10.00 and sells a $10.00 call.

I don't see any major differences in the risk

also take the cost of carry into account
interest rate on money used to by shares
naked put only requires margin, much less than carrying cost of purchase
naked put requires 1 brokerage fee to put on
c/call requires 2 broker fees to put on

depends what your long term aim is
gary

 

[sails]

Re: Covered Call vs Naked Put

Agree with Cutz - synthetically they are same and carry very similar risks.

However, also agree with Gary's thoughts on cost of carry IF paying higher than risk free interest rates on margin lending. Otherwise, the cost of carry is already factored into calls and is the reason there is more premium in calls vs. identical strike/month puts.

 

[long88]

Re: Covered Call vs Naked Put

always try to find a synthethic and see if you can get it cheaper.

why would you put out extra money to achieve the same result ? doesnt make sense.

so if you plot the graph.

short put = long stock + short call
Stock collar = Bull call spread

and i am sure there is some other synthetic available, just google it.