Buying calls and shorting stock is equivalent to being long puts. Thus, you may want to spare all of the trouble and just buy puts.
Bvam, I don't think with 10K in cash you would be able to short more than 500 Qs at 30. No way they would lend you 60k against 10K in equity. Second thing, buying 20 contracts is being a PIGGY with a 10 K account. Why not buy one contract and short 100 qs to test your theories? _________________ Well, I was hoping that some of you would know of firms that allow this! It might not be possible in retail firms, but could it be possible in prop. firms? To sum it all up, is there a firm that allows me to short having the calls as my hedge and compensate my buying power for the difference between the strike price of the call and the price I shorted the stock for? (In this case is 5, 30-25 = 5)
hardrock375, I made a typo. It was suppose to be an exclamation point, not a question mark. Freehouse, there's a reason behind my questions. And in this case, buying calls and shorting stocks is not equivalent of buying puts. I know you'll argue with me, so allow me to illustrate. QQQ at $30 QQQ 28 call = 2 buying 1 QQQ 28 call, short 100 shares. If price up, breakeven not including comm. If QQQ goes down, but less than 2, still breakeven like above. If QQQ goes down more than 2, I'll profit the difference. Of course, QQQ rarely, if ever, goes down more than 2. But I am using it to illustrate a point. Buy calls and short stock is not the same as buying puts.
bvam - your example assumed there was no premium and no bid/ask spread to the price of the call you were buying - even deep in the money options don't sell for only their intrinsic value usually. Factoring in proper call vs. put pricing and basically a long put is equivalent to a short stock/long call combo. The caveat being if you plan to manage the combo delta neutral and hopefully scalp incremental profits off the adjustments during its life.
bvam1, I believe the consensus is right, the risk graph of long calls/short underlying is identical to long puts. Similiarly, long 2 calls/short underlying is identical to a long straddle. It seems to me you are asking if your broker will take your position into account when calculating how much margin they are going to require of you. While this may be logical it simply does not happen. Overall net margin calculations are possible in the futures market though. For example, your margin requirement for the short underlying would be greatly reduced if you put up the cash to buy the calls. As another example an OTM short vertical spread in equites requires the standard 'spread minus the premium' as margin. But in futures the OTM short vertical spread's margin is usually much less. One of the great benefits of an options trader in futures is the broker calculates account margin but in equities they tend to add all the position margins together, which is more. Good trading.
SLK, FOC, BEAR, from what I read some of the prop firms allow this strategy, Don Bright has said some of his traders do this but they don't encourage it. Search for previous threads.