Yeah, I'm trying to figure out how it is possible that a covered call strategy is under-performing the benchmark. By definition it should always outperform by the premium collected in a down market.
Ah but I only pick stocks that will have surprise increases. I also only pick stocks that will go up on earnings. And I only play roulette when it gonna land on black. Seriously, unless someone has insider info, are we really gonna make dividend adjustment an issue here? Like Atticus said, there is no net advantage to either side.
This is now obtrusive. What I said I know is true and I have numerous real-life examples to back it up. What you are providing is theoretical and does not fit with what I'm doing with my approach to covered call fund management. For me the matter of minimizing losses is of vital importance. You may not (no offense) understand why this to me is so important, but time will perhaps tell. Many, many, many times I've entered a trade (bought stock in 100 share increments to turn around and sell, on a share-by-share basis, the ATM call option to recieve the premium in my account) and had the stock go down! I (nearly) always "unwind" the position once it reached my "theoretical" stop-loss point (breakeven: stock purchase price minus the call option premium recieved). I know what this entails! The call option (ask) price drops with the stock price as it becomes OTM, but may still contain some "time" premium depending on how many days are left until expiration. When I close these positions this (mostly) never is a 0% loss. The "time" value left from the short call may dictate that I incur a "small" loss of perhaps 2-4%. Now, that being said the same is not true with the short put. It increases in value - NEARLY DOLLAR-FOR-DOLLAR, so the loss is FAR WORSE. Hear me now (please). I will not continue to go round-and-round about this anymore: The ATM covered call position may require me to spend $5000 on a $50 stock in order that I may sell the 50 strike call at say $3. When that stock drops to $47 the call may cost (round figures) .50 or a dollar to buy back, but my loss is exactly that. The ATM naked put may sell for $3 as well. BUT (hear me now) when the stock goes down to $47, the put option goes ITM and hence the dollar-for-dollar price appreciation. BTC the naked put option WILL COST ME DEARLY to the tune of $5.50 - $6.00 (round numbers), hence a $2.50 - $3.00 loss. Yes I am only required to have a third of the $5000 of buying power for selling puts naked (and can generate interest), BUT FOR ME, the $0.50 - $1.00 loss is acceptable while $2.50 - $3.00 IS NOT. What you have been saying is very well and all good. But it won't fit well for my strategy (stop) methods. I don't stick around for the stock to fall dollar-for-dollar below my "breakeven" point! There are substantial gains from my covered call strategy AND a few other ways (outlined before) to much improve my current average yearly return, I will continue to do what I know works. Thank You, PaySense
indeed, so a short put *isn't* exactly the same as a covered call position. i'm sure you know that, but a lot of posters in this thread don't.
This shows you don't quite understand it. Put the numbers in an option calculator and you'll see. Stock at $50, call at $3, put at $3 Stock drops to $47 - assuming it's the next day and volatility is unchanged. (doesn't matter because it'll effect put and call in the same way) Stock $47 Call $1.67 Put $4.67 Covered call loss = (50-47) - (3-1.67) = 3 - 1.33 = 1.67 Naked put loss = (4.67 - 3) = 1.67
You are making one incorrect assumption that is causing you not to get it. You are assuming that the delta on the put is close to 100. An ATM put carries a delta of about 50. As the underlying moves against the naked put, the loss won't even be close to dollar-for-dollar. Much closer to 50 cents on the dollar. The loss will be the same size as the covered call loss. If your covered call is at break even for stop loss, the naked put will also be at break even. You are assuming a greater loss on the part of the naked put. This is not the case. They are called synthetics because any differences are so minute as to render them virutally equal.
I do understand this JBL. Thanks for pointing it out. But I don't think that this should concern the OP at all. Trying to outguess a company's dividend adjustments is futile IMO. Any negative effects of a small adjustment will be dominated by the leverage advantage created by the synthetic. Any positive effects will be enhanced thereby. Over the course of many years, no net advantage/disadvantage. A diversified port shouldn't care much.
The risk on to the dividend stream acts inversely to rates in its infleunce on any arbitrage in equity/index options. A large change in the dividend stream has a > impact [than rates], historically-speaking.
This may not be exactly true - maybe more so if the position held up for a few days as opposed to it hitting the stop the very next day (for me almost never the case). Also "time" premium is more of a factor the further away from expiration. Like I said earlier, all I can do is add a paper-traded naked put sell with each position I enter in my funds to really get a feel. I do this every day in the real world, so I just need to put forward some real world examples. I KNOW that an ATM position may move against me and the closer I am to expiration the more likely the call will decrease (closer to) dollar-for-dollar, just like the near dollar-for-dollar increase to the put with the drop - since there isn't much "time" premium. You are saying they move in tandem or the same. I need to see this in black-and-white. I know the posters on this thread are advanced in their area of expertise. In the corporate world I worked in Silicon Valley as an Sr. NPI (New Product Introduction) Optical Engineer. Now I am a supposed expert with covered call fund management. I can post my resume of accomplishments (B.S. Optical Engineering, Math minor), but I'll spare the masses of any more drivel. It is fact that the training services I provide ARE UNIQUE in the covered call arena. In all the years I have been in business, NOT ONE outfit out of many hundreds of thousands can even attempt to actually manage, with ANY degree of success, a 'real-time' covered call fund. Of course, I am always open to improvement .PayS
A single adjustment in dividend only effects the naked put position once. For the effect to be significant to a portfolio, the dividend increase would have to be fairly significant and happen each quarter to nullify gains from better marginal leverage. Still in a diversified port the effects are minor. The number of companies not issuing dividends at all is huge, not to mention the tax advantages of using futures or broad based index options anyway.