The option premium itself factors in dividend payments. My point is that those who hold the stock through the dividend distribution period, will gain more than someone who writes a put of equal premium as the call---if both the put and call expire worthless on expiration. I am assuming that most of the folks here don't write options for long time frames to think about dividend plays, but if you do it is a factor.
Avaturk, please tell me why selling a call and buying a put is superior to shorting the stock. I recently inquired about this myself. I received another reply on another site extolling the vitues of the short vs. the synthetic you suggest. Please explain. Thanks.
We're all chums here, it's the Elite Trader motto. Hey maybe I'm confused and there is some huge difference that's escaped me. Anyhow, I can die in peace now since I did get one 'you're wrong' out of the thread.
And interest on the cash you would need to buy the stock is also factored in. That's why you get more for calls than puts.
I worked as a Senior Registered Options Principal for many years and I can tell you they are not the same thing. A naked put has to be sold in a margin account (type 2). The margin requirement increases as the stock declines in value. In a covered call account the margin decreases as the stock declines in value. I have seen naked put traders make 20k a month for a few years and then lose their whole account in a bad market such as 98
Sometimes you cannot borrow the stock that you want to short. Thus, the synthetic short will allow you to short the stock that you would otherwise not be able to short (although it can be expected that the call and put prices will be priced accordingly to take into account that the stock cannot be borrowed).
Suppose you have $10,000 in your account. XYZ is a $10 stock. The call price is $1 and the put price is $1 (based on put call parity). In the covered write, you will buy 1,000 shares at $10 and then sell 10 calls for $1. Your net debit is $9,000. With the naked put, you will sell 10 puts for $1. You have a net credit of $1,000. If the stock goes bankrupt, you will in both cases lose $9,000. If the stock stays at $10 or goes higher, you will in both cases gain $1,000. If the stock goes to $9, you will break even. Thus, in both cases, the covered call and the "naked" put have the exact same payoff structure and are thus equal.
It is certainly true that a synthetic short (buying a put and selling a call) has the same P&L vs. stock price curve as a regular short position if you hold the options to expiration. But I wonder about a range of other differences between these two strategies. <b>1) Is the net delta of a synthetic short always -1?</b> Does the P&L for a synthetic short only match that of a regular short position on the expiration date? Would volatility impact the open P&L for a synthetic short differently than it would for a regular short position? Would a synthetic short provide the same opportunity for exploiting very short-term price drops? <b>2) What about bid-ask spreads? </b> The bid-ask spreads on options seem much worse than the bid-ask spread for most stocks. This would lower the profitability of synthetic shorting. <b>3) What about timing issues in entering or exiting a synthetic short? </b> If the stock price is moving rapidly, the timing of the two halves of the synthetic short transaction would expose the trader to these movements (it is a risk as the timing could be favorable or unfavorable). <b>4) Are the margin requirements the same for both strategies? </b> Aside from account type issues, both shorting and options trading have specific requirements about margin. But are they equivalent when all is said and done? <b>5) Can assignments screw up or improve a synthetic short? </b> If the person who bought the call decides to exercise the option, then the synthetic short trader (a diminutive android??? ) is left holding a put. Or, might the trader chose to exercise the purchased put under some conditions (an extreme down-move of the stock) and be left with a deep, out-of-the-money naked call??? Please correct any misconceptions that I might have here. I don't trade options, don't really plan to trade options, but do like to understand how they work and whether I should trade options. An open mind seeking eye-opening replies, Traden4Alpha