You could accomplish the same goal simply by being long stock-short call then when the stock drops, sell another call. Selling naked puts is synthetically the same as being long stock-short call. Although you do have some margin advantages to selling a put (20% regt margin of the strike) vs buying long stock (50% reg t margin of stock price). However, the risk graphs are identical.
Ebay closed at 42.00 today. Scenario (1): Sell the Aug 40 Put for 0.35. Scenario (2): Buy 100 shares at 42.00. Sell the Aug 45 Call for 0.30. August 19th, eBay closes at $30.00. Results: Scenario (1): Unrealized loss of 9.65/share (since you now own 100 $30 shares at a net cost of $39.65). Scenario (2): Unrealized loss of 11.70/share (since you now own 100 $30 shares at a net cost of $41.70). What say you, Mav?
Maybe I am missing something, but what is there to say? Scenario #2 is arb-equivalent to selling the Aug 45 put naked at $3.30. Yeah, you'll lose more in selling the higher-strike put.
not the same risk-reward position. aug 19 , ebay at 45, scenario 2 has $300 + $30 appreciation, scenario 1 keeps $35.
You beat me to it. Our buddy has to sell the Aug 40 call for 2.55 to have the same risk structure. Let's let him do the math again using the 40 call before we say anything. Maybe he will figure this out on his own. Probably not. LOL.
Right, it's known that the positions aren't carrying identical exposures: scenario #1: Selling a 40p scenario #2: selling a 45p synthetically
Mav and Risk, What would be the covered call equivalent of selling the out of the money put (selling the ebay Aug 40 when the price is at 42.00)?
OK , Joe... that's cool, but simply because the two are equidistant from spot isn't meaningful. The point is the risk-dissection. Edit: Yeah, it's more likely to get assigned on the put, but not overtly a concern. There is a myriad of choices once you're long the shares; CCs, overwrites, etc.