Selling covered calls and puts against long and short stock positions

acecard

Newbie
9 0
Hi all,

I have been trading forex for a while but have just started looking at US stock/index/EFT options (I know there is an options forum, but I think this is more of a stocks question!).

I am interested in the concept of writing covered calls, which of course would involve owning the stock. Now, when I think about this, the call seller would collect a guaranteed income from the option premium. However, this is not fool-proof as the stock could depreciate. If one owned the stock for the long haul then, so long as they ensured that they were never assigned (e.g. by closing the position early), then this would not be an issue because they would just hold the stock indefinitely.

However, If someone didn't want to commit to owning the stock indefinitely, then what about this idea???........if one was also short on the same stock at the same price then you would always be approximately neutral and protected against the movement of the stock; in theory, you could then write both covered calls AND covered puts against these and make the guaranteed income.

What I am wondering is whether this is a viable strategy? I know short selling is risky, but if one could cover any difference with what you made on the other side, then surely the risk is mitigated???? As far as I can think, the only " cost of business" other than the commissions would be the interest needed to pay the broker for the short.......is this correct? Also, I imagine that I would need to do this in 2 separate accounts???

I am trying to think of all the pitfalls before I start paper trading this concept.......surely I have missed something?! Any problems stick out to anyone?

Appreciate the help!
AC
 

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