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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1205  
Subject: Re: Covered Call vs. Naked Put Date: 11/24/2003 12:03 AM
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CorkyF16

You wrote, Since writing Covered Calls is oftentimes espoused as a "Conservative" Strategy, why then isn't it the same for Naked Puts?

The risk/reward curves are the same.

So why the taboo against them?


I assume you mean a Covered Put; not a Naked Put. ( http://www.cboe.com/common/pageviewer.asp?file=20010713.doc&dir=lcoptionscorner&head=options%20corner&sec=6 )

Perhaps it's because stock brokerage firms are idiots? Or maybe it's because they're not. Maybe they're just greedy. Quoting from the CBOE, If you look carefully at the profit and loss diagrams of "covered calls" and "covered puts," then you will see that they are very similar. Theoretically, in fact, assuming zero interest rates and no commissions, then the two strategies are nearly identical. If you think about it, both strategies bring in cash from selling options, have limited profit potential if the stock price rises and have the risk of stock ownership if the stock price declines. In the real world, the only difference is commissions. It takes two commissions to establish a covered call and only one commission to sell a covered put.

A covered put can be used to pay you for the privilege of you buying a stock at a predetermined price. Doesn't that sound like a conflict of interest for the brokerage? Making covered puts freely available would make it difficult for a broker to justify charging an [additional] fee for a limit buy order.

Grrrr...

BTW: I may never get past Ameritrade's first option level. I may never have the kind of savings in a non-retirement account that they require. What's more, writing covered calls just doesn't seem practical because I rarely hold more than 200 shares of any one stock. Every time I've analyzed the writing a covered call on a holding, it's always seemed that either I would have been better off placing a limit order to sell; or most of the premium of the contract would have been eaten up by brokerage commissions making the transaction pointless.

All these limitations seem crazy to me, because I think buying and holding calls and puts may be a very viable risk management strategy for me. Unfortunately, my broker won't give me access to these tools.

- Joel
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