Using Long term puts to protect covered calls

Discussion in 'Options' started by bagg, Jan 19, 2009.

  1. bagg

    bagg

    Hi all,
    I'm a noob to options but a reasonably seasoned stock trader.

    Writing CC's appeals to my innate greed and I was wondering if anyone buys LEAP puts (or some other longish dated put) to try and protect in case of a bear market.

    If so, what do you find is the best way to use them - continually rolling down, and if so what triggers you to roll?

    Sorry if this has been done to death - I have read most of the recent-ish CC threads and couldn't find much on it.

    Thanks a lot,

    bagg
     
  2. Carl K

    Carl K

    Long Underling, Long Put, Short Call
    +u, +p, -c = Collar

    Search for "Collar"

    Same as +c, -c = Bull Call Vertical
    +c & -c @ different months
    If +c = far month, -c = near month == Diagonal

    Carl
     
  3. dmo

    dmo

    I hear a guy in NY named Madoff made a fortune doing this.
     
  4. bagg,

    It does not pay to buy a very costly put to protect a covered call. And LEAPS are very costly - especially when IV is as high as it has been in recent months.

    1) A covered call is equivalent to a naked put - same strike and expiration for the call and put.

    2) You would be buying a calendar spread if you adopt your suggestion: owning the long-term put and writing the near-term put.

    This should NOT satisfy with your 'greed,' and I don't like this idea for YOU.

    3) The best protection is the near-term put. Tet, it may appear to be throwing away money. When LEAPS are expensive, it's better to spend less money on protection.

    4) The strategy you seek is equivalent to the collar (covered call plus put), but is simpler to trade. It's the put credit spread.

    Sell the put that's equivalent to the covered call, and then buy another put, same expiration, lower strike price.

    Mark
    http://blog.mdwoptions.com/options_for_rookies/
     
  5. He used a very simple algoritm:

    +u +p -c = money gone
     
  6. CC's and innate greed?
    (eye roll)

    If it's a bear market, stop writing CC's and utilize bearish strategies.

    As noted by others, your CC protected by a put LEAP is equivalent to a diagonal spread. If you're going to dabble with diagonals, IMHO, buy mid term protection rather than LEAPS because their cost is lower and you'll lose less on it if the underlying zooms up, never to return to former levels. In addition, you'll get more bang for the buck with shorter term protective puts than with a LEAP, asuming IV remains the same.

    You roll protective puts down when you have a profit and you believe that the underlying is going to rally. Personally, I'd roll them in as well in order to lower their cost. Unfortunately, if you're wrong, you've added add'l risk because your protective strike is lower. C'est la vie. C'est la guerre. C'est no more.
     
  7. bagg

    bagg

    Thanks guys.

    Makes sense. I'd read about Put credit spread but it hadn't quite clicked. Got it now - thanks again.

    bagg
     
  8. Another newb question on an old thread.

    Now that IV is lower would it make sense to use this strategy of buying Leap puts and writing CC on the underlying? Also from my understanding Leaps are supposed to be cheaper in the long term than buying then short term puts arn't they?

    I'm looking for a more conservative strategy than i implemented last year.
     
  9. See dagnyt's reply on the previous page.

    IMO, LEAPS are not a good idea for diagonals (a covered call with put protection). They involve too much time premium and are sensitive to change in IV - which can be good or bad. Use mid term puts (3-5 months) if you're going that route. They have a better risk graph. Model some positiions and you'll see why.