Yes, it's BS - this and others like it were the map to Hell for a lot of CC believers after the bubble burst. The myth goes like this - selling CCs enhances returns (but only if the stock price remains relatively static so that you don't get called) and lowers risk (but only to the extent of the premium you collect). Since premium is related to how close the strike is to the current price, the more premium to try to collect (to "lower risk") the closer the strike is you have to sell which increases your chance of getting called. You also have to deal with the implied volatility which you have to hope doesn't increase after you've sold the CCs. Basically, CCs fix your upside while providing only marginal downside protection. If the stock tanks, you're no better off (and perhaps worse off) than in the long stock/short call scenario. Short puts have exactly the same risk/reward profile as long stock/short calls (often with more favorable margin requirements) and they're also easier to set exit stops for than a CC position. Also for clarification, it's not necessarily an issue of "being willing to take the stock at the strike" - although if the stock falls to the strike, you're in no better position with the CC position. It's very rare to be put the stock unless it's expiration and/or your short puts are very in the money. Otherwise, it's better for the person long the puts to sell them. For a person truly looking for risk protection of long stock positions - married puts. Unlimited upside (if the stock takes off, which presumably since you're long the stock that's what you're looking for) and a fully fixed downside risk - plus potentially attractive margin rules depending on whether your broker recognizes hedged positions. Related alternative is a collar (straight or synthetic) which depending on the situation and factoring in margin requirements can also be fairly profitable.
Perfectly put, but the points that Im trying to make are that, IMO: 1. eventhough writing covered calls and naked puts have similarities, they are not the same thing by a long shot; 2. before deciding whats the best strategy, the necessity in place must be precisely defined.
i'm all ears, as it would overturn the fundamental principle underpinning the entire options industry.
the net sum of stock and puts is parity plus or minus commish... hence the name married puts... at expiration put plus stock equal strike!
Damir00, I cannot say too much about quotes out of their respective context. I still maintain my position that eventhough they may lead to the same "results" under certain circumstances, they are not the same "thing". If they were the same thing, the act of choosing between the two alternatives would be a 100% random event. But you know what, chances are we are arguing over semantics.
those "certain circumstances" are any - yes, any - movement of the underlying. if you truly have a counter example, please post it, as it would certainly be a learning experience for me. a nice discussion from Value Line, complete with spreadsheet... http://www.valueline.com/edu_options/rep4.cfm