he was replying to this post: MTE Registered: Jan 2005 Posts: 3182 04-21-11 02:24 PM "Here's your strategy simplified: sell 46 put, sell 54 put. In other words, all you are doing is selling two puts with different strikes."
Can we talk about the OP: 1) I have ABC stock bought at $50. 2) Sell Put option with strike price of $46 (pocket $1 premium) 3) Sell Call option with strike price of $54 (pocket $1 premium) Instead of sell 46 put, sell 54 put They are not the same.
why is it every few weeks we have a debate about covered calls and naked puts.? is it so hard to understand? covered calls=naked puts naked puts = covered calls both = long stock less premium find an options analyzer and run the numbers. i am not even saying one is that much better than the other. both give you small gains and large losses. we should at least understand what we are doing. i suspect the op somehow thinks that one side of his play protects the other. that is not the case. they are both two sides of the same coin.
OK. A stock is $50 at expiration: If I sold a $54 PUT, I would have the stock PUT to me at $54. If I sold a $54 CALL, nothing would happen. What did I do wrong? I don't know what the OP thinks about one side protecting the other. I think owning the stock protects the CALL Sold at $54. There is no protection for the PUT at $50.
if you sold a 54 put and the stock was at 50 you would get the stock put to you if held to expiration. now calculate out what your net cost would be for that stock. the same as the covered call. so a naked put =a covered call at expiration. in both cases you end up with long stock less premium recieved.
I see that the P/L graphs are the same but hereâs my analysis. BTW I appreciate you helping me with this: Selling $54-PUT: Pay $54 for the stock Receive $1 dollar for selling the option Result, $53 dollars for a $50 dollar stock Own twice as many shares as before. Selling the $54 CALL: $1 dollar for selling the option Own the same number of shares as when I started. Do you agree that at expiration one senario owns twice as much stock as the other? I have to leave will get back to this later ~1hour. Thanks
stock at 50. sell 54 put. you recieve $4 plus premium of $1 in this example. you pay 54 for the stock. but you recieved $5 for the put. "Do you agree that at expiration one senario owns twice as much stock as the other?" no because you replaced the covered call with the $54 put so you started with 0 shares. i have to leave too. for the whole weekend. good luck.
As I thought about it I came to the same conculsion that if you sold the stock the two senarios would be equal. But since they are equal why worry about. If the OP wants to own the stock and sell the call then why do we have to switch to the other situation before we discuss the pros and cons of the original post.
Your assumption that the stock is worth $4600 on the put exercise is incorrect. That may be the price it was "Put" to you but the market price could be lower.
Understanding the equivalence serves 2 purposes. 1) it makes understanding what the position is much easier 2) it saves on slippage and commissions if executed simultaneously