CC vs Short Put (dividend paying stock)

Discussion in 'Options' started by a529612, May 11, 2007.

  1. I've been told CC and Short Put are essentially the same thing. What about if the underlying stock pays dividend and is about to go ex-dividend? Will the short put premium have the dividend factored in? Thanks!
  2. Option premiums already contain interest and dividends. Covered calls and naked short puts are the same.
  3. wayneL


    Think about it. If they were not the same there would be a juicy arbitrage opp. at dividend time. It won't happen.

    To repeat, they are the same.
  4. If you look at the P/L profile they are, but there are practical differences. First, a CC is two positions versus one with a short put, which means more commish, and more chance for slippage. Although this is balanced somewhat by the fact that the underlying is more liquid than the option.

    Basically, if the position goes wrong, you'll likely lose money faster with the naked put.
  5. wayneL


    Your two paragraphs appear to be at odds with each other if I am reading them correctly.

    The only possible difference is (as you mention) contest risk. Theoretically, greek wise, the same.

    If the difference is marked, an arbitrage opportunity again arises and you'd have to be "The Flash" to catch them. So the difference is not likely to be significant in real terms.
  6. New maths?
  7. No, but if you're trying to get out in a fast bear market, you'll likely get out of the underlying with with less slippage and narrower spreads (percentage wise) than the option. You can then close out the call later if you wish during a less frantic time with the CC.
  8. Or perhaps you offset the stock and the trend reverses. Or the market continues to meltdown and strip vols jump, or both.
  9. Perhaps, but my point is that while a CC and a short put are theoretically (mathematically) the same, market conditions can skew that relationship.
  10. danoXP


    If one is willing to split a CC position, by closing out the underlying (due to trading slippage opportunity), then one should be willing to sell the underlying (or go "Short") if one was holding an exactly equivalent "short put" position. This should yield the exact same trading P/L as CC.

    Yes, Short Call=Short Stock+Short Put.

    #10     May 12, 2007