Covered Calls vs. Naked Puts
Today Skip Raschke wrote a fantastic article discussing two option strategies--covered calls and naked puts--pointing out that they are synthetically identical. Concepts like this are so important to learn and can make traders much more successful once they grasp them.
But the spirit moved me today to follow up on Skip's article as a result of a reader's comment to Skip's article. I wanted to take the opportunity to help clarify why a covered call is synthetically identical to a naked put.
To best understand, consider what happens at expiration to the stock options in each of the two strategies.
Stock above the strike price at expiration: The call is assigned and the stock is consequently sold. Maximum profit is reached and there is no resulting position in the stock.
Stock below the strike price at expiration: The call expires and the trader retains possession of stock. The trader assumes the risk of stock ownership, which could possibly lead to a substantial loss should the stock fall precipitously.
Stock above the strike price at expiration: The put expires. The trader achieves maximum profit potential and there is no resulting position in the stock.
Stock below the strike price at expiration: The put is assigned and the trader gains possession of stock. The trader assumes the risk of stock ownership, which could possibly lead to a substantial loss should the stock fall precipitously.
The end game is the same in both strategies: no stock position and max gain if the stock is above the strike at expiration; or owning stock with all the risk implications that come along with it if the stock is below the strike at expiration.
Click here for a 14-day free trial to Options Profits
OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits
Dan Passarelli can be followed on Twitter at twitter.com/Dan_Passarelli.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass + 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV