To me the big difference between trading covered calls and selling a put is risk potential. Covered calls are considered one of the safest ways to interact with the market. Selling a put has unlimited risk potential. I took Joseph Hoopers class several years ago and use the techniques when things line up. It works best in sideways to slightly rising market but it's often difficult to find stocks that fit the criteria. Also a certain percentage of the stocks will drop and your stuck with them over time but you just keep selling calls on them every month and think of it as rental property. You can make a consistent 2% per month doing covered calls. I use several trading strategies in stocks and futures depending on the current situation. Two things I don't do are purposefully day trade or try to get rich overnight.
how can the naked put have unlimited risk? Aint a naked call like buying 100 shares selling 1 call? The risk looks similar or am I getting this all wrong.
You're right... The risk of a naked put is limited, assuming the price of the underlying cannot be negative.
These threads are ridiculous. The only risk/opportunity cost is rho (holding both positions simultaneously) over the duration the positions are held. There is no inherent benefit if you exclude an interest-rate prediction/dividend surprise or commissions. If you are clairvoyant and know rates will fall precipitously, trade the CC, but it's not going to cover the costs associated with the position. IOW, there is not enough rate-risk embedded in the position to make for an outright spec. All natural/synthetic risks are limited to interest rates. Conversions, rolls, etc., are bets on interest rates.
At last we have heard from the all knowing and informed that All these threads are ridiculous. So RHO is the only real risk. And to think..... All this time I was trading based on my expectations for the Underlying....
NP is superior to CC if you buy stock on margin. You don't have to own and hold the stock with NP unless assigned. So you save some margin interest there.
I am new to options but an option strategy combined with stocks is best i think when writing options. for example if you want to own stocks, sell puts, it gives other people the right to sell at the strike to you. So if you want to buy a stock at a certain price (strike) naked put is great way to lower the cost, or make money. or if you want to sell a stock, but dont think it will appreciate much, but dont want to sell for a loss, you can sell a covered call. This works out even better if you get regular dividends with the stock. If you write options naked without the intention to ever own stock I think it's a gamblers game.
Okay, my bad....maybe. Please explain how selling any naked option has limited risk? Limited to the underlying going to zero? Thats unlimited enough for me. I sold a call on rmbs once for 11% and a week later sat and watched the stock drop several dollars in minutes based on BS news. After a few days it came up to where I could get out close to even. If I had sold naked puts I would had to cover at a huge loss or possibly be excercised at an even greater loss.
Other than the interest rate issue (which is not much of a real consideration) a covered call is exactly the same as a naked put. It is absolutely not less risky.