A covered call and a short put are equivalent positions. Add a long put to each, and you get a collar equivalent to a put spread. You can go to voptions dot com and see visually that the collar and bull put spreads are equivalent posiitions. What are we missing?
Those people/sites regurgitate without thinking under the surface. There are many unseen things. I will not say everything. Let just give one case where things can go wrong. Build an "equivalent" position with positive cost of carry (for instance positive interest rates, and you can increase time to see the point), then make a 50% gap down on your stock. Now reevaluate your position, and tell me if you notice anything, and which side you would like to be on in the "equivalent position"! In your calculator make option american.
Now there's a lesson that you can bank on ! From now on, everyone should trade the equivalent on all stocks that they expect to gap down 50 per cent ! ROFL
rft, I ran a RWASAS on a collar vs a spread for a $50 stock and a 50% drop in price, gap down, no chance for adjustment, and a close down of the trade. There are several ways of using equivalency. I decided to use a $100 net return and front month options as the common elements. The results are as follows: Collar trade size $5000, ($2500 margin) Time in trade, 1 month Net $100 (Short call-Long put) Max Risk $500 (45 strike put) (10% stock, or 20% of margin) Trade Loss at 50% drop in stock, $400 ($500-100) Trade activity, buy stock, sell call, buy put, put stock to put buyer Spread trade size $500 margin Time in trade, 1 month Net $100 (Short put-Long put, 5-pt spread) Max Risk $500 (100% of margin) Trade loss at 50% drop in stock, $400 ($500-100) Trade activity, sell spread What stands out for me is the smaller trade size for the spread and the trade activity is one element vs four with the collar. I understand the fact of 100% max loss of the spread, but that is factored in for me with the smaller up front trade size, so I could have 4 more spread positions on other stocks, considering margin. I dont buy stocks or do spreads on stocks just because of the risk of a major drop in price. I do spreads on ETFs. As has been said before by others, you have to avoid the max risk.
This was a big argument on here some time ago with some of the clowns at "The Big O". You lose the up front cost of carry on the vertical. Depending on the life of the spread left if this happens, it's not a huge amount and only realized if the collar is exited. Also as Spindr0 points out, a 50% fall is not a high frequency event. Unless I already own the stock, I'll take the vertical spread thanks.