TBS is correct. Naked call/put means that you sell the option without being hedged with the underlying. Delta hedging ring any bells?
Covered call loss aproximatly zero with correct hedging
Naked put loss is K-S
No you are wrong!!
This is what I mean when I say people get confused.
Look,buy stock at 50 sell a CC at 50 for 1 stock drops to 40 you are 9 down.
Sell a naked put at 50 for 1 stock drops to 40 stock will be put to you at 50 minus the 1 you received you are 9 down.Exactly the same!
If,at expiration,stock is above 50,1 point will be gained in both instances!
It does not matter how low or how high the stock goes the results for both are the same.You could say the naked put has the advantage in that the margin requirement is a lot less than buying the stock!!
What ARE you on about????
Sorry where have I gone wrong?
Covered call strat:
S @ 40 => delta=0 => holidng no stock hence portfolio is +1 (premium) from sale of call
S @ 40 => K-S - premium = down 9
Robertral,please let me try to make it clearer.
You bought a thousand shares of ABC at $50 a share makes $50,000 and then you decide to sell a covered call at 50 strike for $1000,the next day the stock gaps down $10 you are now losing $10,000 minus the $1000 you received for the CC=$9000.
The deltas have nothing to do with this!Had you sold the 50 strike naked put you would be in exactly the same position.I hope this makes it clearer!
So you wouldn't adjust your underlying position for your CC if the stock went down $10?
You've given an example that as no practical implications....What is the purpose of this example?
Delta has nothing to do with it????????
You could adjust your position in the underlying exactly the same as you could with a naked put.
Do you trade options?
What is it that you can't see?
I'm sorry if this sounds rude,but you don't have a clue what your talking about and you should not be messing about with options until you have a greater understanding of what you are doing.
If you would like to get hold of a great 305 page book(for free)just let me know it's called"Coulda Woulda Shoulda"by Charles M Cottle.Concerning covered calls vs naked puts here is an extract from the book.
THE NATURE OF A POSITION
There are three main reasons that traders lose money. First, they simply
have a wrong opinion of the market in a game where money is made and
lost based on opinions. Second, traders lose their discipline and the
patience to follow their own rules. They may have a pattern of riding
losing trades, coupled with taking profits too soon on winning trades. A
third reason can be explained by ignorance about the nature of their risk
and market nuances.
Consider this brief true story that demonstrates where risk has not
been correctly assessed:
Story: Covered-Write: A trader once came up to me on the floor
of the exchange and asked, “What do you think about selling
the 90 calls at about 9.00, and buying the stock here at about
96.00, one to one (one call for each 1oo2 (100) shares)?” His
reasoning was that if the stock stayed at current levels,
traded higher or at least stayed above 90 he would have a
profit of about 3.00 ($300) for each one to one spread. That
assumption is correct but I then asked him, "Hold that
thought to the side for a moment and instead consider, as an
alternative, selling the same quantity of 90 puts at 3.00
naked3?” He was quick to answer, “No, never, I would hate to be naked short puts!” I then showed him that the two
trades are virtually identical. Being naked short puts is very
suitable for certain investors in certain circumstances but it
seemed reasonable to assume that the trade was not for this
particular person. End
Had the trader in the example known that a covered write was like
a short put he would have realized that he himself would not do the trade.
This is where synthetics come in. It would have been a suitable trade
had the trader been willing to be short naked puts and had the financial
resources to cover the trade. However, this trader did not know, that for
all intents and purposes, a covered write4 IS a short put. A full
understanding of the consequences of a position beforehand is essential.
No matter how the position is viewed (including synthetically), the trader
should be happy with it, know approximately how long he wants to
remain in the trade, and know how he will handle it under profit and loss
YOU sell you a call right? and you hedge it by buying the underlying? correct?
I am correct so far?
No Robert,if you own the stock you sell a call,if you don't own the stock you sell a put.
Come on you other guys on this thread help me me out here.I'm drinking beer here and Robert's driving me crazy!!Can you explain it better than me?
hang on..what are we argueing about here?
"if you own the stock you sell a call," that is exactly the same as what I said --> "you sell a call right? and you hedge it by buying the underlying? "
I GIVE UP ROBERT!AS BASIL FAWLTY SAID,
"I COULD SPEND THE REST OF MY LIFE HAVING THIS CONVERSATION".
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