Question on buy-writes

Discussion in 'Options' started by coolguy17, Apr 16, 2007.

  1. coolguy17


    Do I calculate the net debit price on the ask price for the stock or the strike price?
  2. spindr0


    The net cost of a buy/write is the cost of the stock less the premium received for the call sold.

    The strike is used to determine the point at which you achieve the maximum profit (above) and where you start to give up some of the actual or potential profit (below).
  3. Don't buy-write, sell a naked put instead.

    (practically) Same position, less slippage, less commissions.
  4. coolguy17


    I sold naked puts before but doesn't using a buy-write generate more money?
  5. jj90


    It's the same thing.
  6. panzerman


    Effectively it's not the same because liquidity and slippage is different with the equity position of the CC than the pure option position of the naked put.
  7. You're correct -- effectively the CC is inferior.
  8. No, less money due to extra slippage and commissions.

    ALTHOUGH, if it's long-term, like a 1 year buy/write, it may be beneficial to do the buy/write, because most brokerages pay less then 5% interest / year, and a covered call vs naked put prices in about a 5% interest rate / year.
  9. jj90


    Well, yes but now we are arguing minute details. And please, somebody doesn't need to point out such a distinction will result in less profits etc etc blah blah blah. I would think we all are aware of that.