Advice on Covered Calls

Discussion in 'Options' started by jo0477, Mar 24, 2013.

  1. If you want to sell cash secured puts, but are not allowed to, you can do the exact equivalent.
    That being, initiate a buy/write strategy.
    That being, you buy the stock at the strike you desire, and write the equivalent credit you desire.
    Just like selling a put, you pick the strike and credit you desire.
    If the strike and credit don't get filled together, the trade is not initiated.

    However, instead of collecting a credit, you initiate a buy/write as a debit.... but it's the equivalent of getting a credit.

    For example,... a stock is trading at $23, and you would normally sell a $20 put for a credit of $0.40.
    Instead, you intiate a buy/write.
    That being you buy the stock at the equivalent of $20 and at the exact same time, you sell a covered call for the equivalent of that $0.40 credit.

    However, the credit is set up as a debit via this strategy.

    Ask your broker to walk you throught it, and how to set it up.

    Example,.... If i want the equivalent credit of $0.40 as I'd collect via a put,
    I would write the order as a debit of $19.60.
    That being 20 - the desired credit of $0.40...= 19.60

    It is the exact same thing as selling a cash secured put, but it's easier to get approval.
    If you are approved to sell covered calls, you are approved to impliment a buy/write strategy.

    The only downside is, because you are buying a stock and earning the credit (debit) at the exact same time, those 2 things have to line up at the exact same time.
    Thus it can be a little more difficult to get fills than simply selling a put.
    But it is the exact same thing as selling a put.
    You get to pick the strike and the equivalent credit.

    You just look at what the the equivalent put is paying for that strike, and you list it as a debit, as in the example i showed you above.
    That being, the stock is trading at 28, the put strike you desire is 25, the credit you desire is $0.80,.... you select the same $25 strike and enter the order as a DEBIT of $24.20.

    That being 25 - the equivalent credit of $0.80 = 24.20 debit.
    Thus, you are buying the stock at a specific price and selling the equivalent covered call.
    If the stock is above your desired strike on expy, the trade is over.
    You keep the credit.
    just like selling a put.
    If the stock is below your selected strike, you bought the stock at your strike minus your credit.
    That being, at your debit price..... per the 2 examples above.
     
    #11     Mar 26, 2013
  2. jo0477

    jo0477

    I've never heard of buy-write in this context. I always assumed it was the same mechanically as a covered call, except as you mentioned, the stock purchase and sale is simultaneous. The theory makes sense, IE if the stock goes above the strike/price, the call would be exercised so you end up with no position and you are credited the strike price + premium. Otherwise you simply buy the stock for the strike-credit if its below?

    So I'm a little confused as to how this would work if I wanted to create a synthetic short OTM put (as per your example) since I'd need to buy the stock for well under the current price to write the call on. Does your broker create a debit position in your account equivalent to the price you agree to buy the stock at if it goes below your strike that your pnl is based off? If you want to close out the position, do you simply buy the call back as per a normal short?

    I did a little checking and I couldn't find anything that referenced being able to use a buy-sell to pick a strike below the current market.

    Thanks, JO
     
    #12     Mar 28, 2013
  3. xyannix

    xyannix

    #13     Mar 29, 2013
  4. jo0477

    jo0477

    Awesome, thanks guys

    Makes much more sense now, the Forbes article on short puts = covered calls helped clear things up.

    Now I just need a valuation method... was in need of a new project anyway!
     
    #16     Mar 29, 2013
  5. you should learn the synthetic relationships ...

    covered call = short put @ same strike
    covered put = short call @ same strike
    short synthetic/ long synthetic in the same series = box
    ie. at one strike your long a put & short a call = short stock
    at another strike your short put and long call = long stock

    call fly = put fly @ all strikes being the same this creates 2 boxes.. you have 2 long synthetic positions in the wings, and 2 short synthetic positions in the body...

    none of these are exploitable in customer accounts..

    there are also jelly rolls.. which are similar to a box but your long synthetic in one expiry and short expiry in another.. at first expiry you get short/or long the stock in which you end up in a reversal or conversion , and then last expiration everything cancels itself out.. you stay statically replicated through the life of the trade no matter what happens to the underlying and the moneyness of the options..
     
    #17     Mar 29, 2013
  6. jo0477

    jo0477

    Ok, if I understand synthetics, boxes would be relative value plays - IE long box, the spreads would need to be overvalued relative to the underlying? Long fly I've played with on paper but I've haven't figured out how to properly decide when to construct the spreads with calls vs puts. Still trying to understand why short fly never seems to move how I'd expect...
    Jelly rolls I looked up quick (I'm on my phone at the moment, very boring family dinner lol) and I'll obviously need to look into this more. Judging by your description and my quick google it seems like its relative value similar to box but time based?

    Again, I could be way off though. Thanks again caveman, helpful stuff.
     
    #18     Mar 30, 2013
  7. static replication.. meaning this is being exactly long and short.. no risk no pay.. boxes/jellyrolls are arb techiques for market makers.. this isn't a way you could make money.. the relationships are what i'm generally talking about..

    jellyrolls is a time spread.. but we as retail customers don't have the ability to make money on these strategies.. keep reading for sure..
     
    #19     Mar 30, 2013
  8. jo0477

    jo0477

    No for sure, obviously not for the retail guy. I figure its good stuff to wrap my head around though just for an understanding to tie things together. Or if I ever get the sick desire to branch out into more complex spreads in the future...
     
    #20     Mar 30, 2013