Thanks xflat. I understood most of what you said and you're right that the positions offset each other. Perhaps from the brokers point of view you are naked but your risk isn't similar, since you actually own the underlying, no?
Nope since if at expiration your long delta gets called away via the call you sold you'd then be naked short delta via the other ETF and thats the same as being naked short the in the money call. The two ETF's offset each other no matter how you slice the pie. When or if the long delta etf gets called you're naked short just like you would be without the 2 etf's and only the nakked call.
Ok, if I understand you correctly: August 1st: Buy 100 SPY Sell 1 Aug Call Buy 100 SH (1x Short S&P 500) Sell 1 Aug Call The SPY and SH cancel each other out for a neutral stock position. On August 15th, one of these gets called. SPY is called away. Currently Long SH, and the SH Call has expired worthless. You now have 2 options: Sell SH and be happy. Buy SPY, and sell calls on both again. What am I missing? I am sorry for being dense over here
Think of it this way. Forget about long and short ETFs, and lets use just one ETF - SPY, which you can buy or short. First you buy 100 SPY. Then you short 100 SPY. Then you short a call on SPY. What is your position now? You bought and shorted the same ETF so your net position is zero. So a naked short call stays a naked short call.
Of course, I completely agree. I just thought that the use of inverse ETF would bring the same effect WITHOUT being naked the call.
In this example, I presume you sell a call on SPY and sell a call on SH. In which case again, you don't need the stock trades in SPY and SH as they cancel each other out. All you do is sell a call on SPY and a call on SH. If the market goes up you lose on SPY call and gain on SH call, but the two won't offset each other as the SPY call will be gaining deltas while the SH call will be losing them. And vice versa if the market goes down.
This seems to be similar in principle to Buying a stock, selling a call and buying a put (a conversion). Except in this case, the Put you are buying is the inverse ETF stock with delta of -100. As a result, are you saying a conversion is the same thing as being naked a call?
You're right, but do you understand what I am saying now? I believe possible screw ups with this would be tracking error, which could be mitigated by selling deeper in the money calls. If you understand what I'm saying and you still think I'm wrong, I'll finally accept defeat ... lol. What you said about selling the calls on both being the same as having bought the stocks and sold the calls is something I'm still trying to wrap my head around. Thanks for humoring me.