(Using ballpark numbers based on today's values.) OK, let's say you bought SPY at 125 and SH at 70. Sold SPY 126 call for $3 and SH 71 call for $1.50. At expiration SPY is 135. You net $4 on SPY, you keep the $1.50 on SH calls, but (assuming 1:1 ratio) you are now down $10 on the SH shares, for a net loss of $3.50.
The inverse mimics the percentage not the dollar change - that wouldn't make any sense. If SPY is up 10 bucks, or 10/125 = 8% So, SH*0.92 = 70 * 0.92 = 64.4 For a loss of 5.60 5.50 profit - 5.60 loss on SH stock = 0.10 Loss. So I guess this would all be dependent on what price you can get for the sold option and whatnot. Thanks
Depending on strikes its really more like selling a strangle. Forget the underlying as has been popinted out many times its moot, the two legs are a 1 for 1 hedge.
Yeah, I realized that while I was eating lunch, but you beat me to it. And thanks for not pointing out my math error. But the position still has limited upside from the covered call, and unlimited loss on the opposing stock, just like a naked short call. And thinking about it further, we are both wrong. You can't mix and match strike prices and premium. In my example the net gain on the SPY would be $400 (12,900 - 12,500). The net loss on SH would be $410 (6440 + 150 - 7000). If the SPY had gone up even further the gain would still be $400, but the loss on SH would be larger.