Covered call vs. short put? Which is better? With a covered call, you get dividends (maybe already priced-in the short put, anyone?), plus you keep your stock if prices plunge.
If the options aren't mispriced, the two strategies yield the same result (the dividend, if any, and carry cost are priced into the options. The advantage of the short put is potentially fewer transactions which saves you on slippage and commissions.
Yeah, it seems so, Black-Scholes already prices it in. Perhaps Covered Call gives you greater peace of mind and transparency, specially when you're managing other people money.
How does it do that? Presuming you allow the relevant option to be assigned, you end up with the same position. No shares if a close above the strike for both short put and CC, and with shares with a close below the strike. (with a bit of uncertainty if it pins to the strike)
PS If you want to see the equivalence... For simplification, pretend that stock XYZ has no dividend and there's no borrow or carry cost. XYZ is 45. The Aug 45 put is $1 and the Aug 45 call is $1. Compare the potential return of the covered call to the naked puit at various prices. Set up a spreadsheet or stubby pencil the answer. You'll see that they both yield the same result.
It's interesting psychological study this CC vs NP argument. The equivalence is proven over and over and over again on the Internets, yet people seem to go great lengths and massive stretches of logic to try and prove why CCs are better than naked puts. Why? What is so psychologically comforting about covered calls, and what is so scary about naked puts? It can't be the leverage argument, because you can be just as blinkin' silly with CCs as you can with short puts under risk margining. On one level I get it... lack of knowledge etc. But once explained, short puts are still regarded as the spawn of Satan, even by some knowledgeable gurus. </perplexed>
A couple of quick comments: 1. I agree that short puts have the same risk profile as Covered Calls and I have nothing against them. 2. IF a person already owns a stock with no options, adding a covered call to that is obviously not the same as now just adding a short put to go along with your long stock. (This is pretty obvious of course) Not to say either is better, but I have noticed that people tend to do this: With Covered Calls, sell out of the money ones and are OK if the stock goes up and it gets taken away or they buy it back for a reasonable loss on the option. With Short Puts, sell out of the money ones and hope the stock stays up. In other words, if the stock is at $45, people tend to sell $50 (or maybe $55) strike covered calls, or $40 (or maybe $35) strike puts from what I have seen. Of course, then you don't have the exact same risk profile any longer. JJacksET4
With a covered call, you actually have a chance for huge gains compared to fixed gains for the short put. Think about delta for a minute. The underlying has a delta of 1 an the short call has a delta of .5. Suppose the underlying goes up 60 points (I trade the ES S&P 500, so this is very possible). Your underlying goes up 60 points and your short call only goes up 30. You are now up 30 points or $1500.00 for 1 covered call. The premium received these days is about 26 points (or $1300.00). I would simply close out the trade, and pocket the $1500.00. Your short put has a fixed profit, and for what it's worth, has a higher margin requirement for the same $1300.00 premium. Again, the biggest difference is the chance for higher profit from the covered call than the short put. On the other hand, I beleive that you get better downside protection from the short put, if it is "ideally" placed.