Krishna Srinivasan

Dow Price Targets

Really like all the nice stats and tables you pull up. Just awesome.
A quick request : Just saw an article here on SA :
seekingalpha.com/artic...

Can you please kindly verify how this theory holds up with your models ?

Thanks.

30-Year Fixed Mortgage Rates

So how is the 30 year mortgage rate arrived at ?
Is it somehow tied to the 10 year treasury yields ?

Possible Outcomes of My Apple Purchase

One should always have enough money to cover the trade if it goes the wrong direction.

Say, you have $10K, you would buy aapl at $9000 and sell a covered call.

So now if you want to use the alternate strategy, you have to do the same exact equivalent. Which is just short one put. And keep the $9000 as the margin to cover.

I never once meant to say that you should short a 100 puts or whatever amount and risk the entire $10K times the leverage-amount in risk.

So I think you were probably assuming that I meant to say sell as many puts as you want - you are comparing two trades of completely different sizes. That was never my recommendation - nor was I talking ever talking about taking on a leveraged bet. I was comparing apples-to-apples. (pun-intended). [100 shares and 1 call OR just 1 short put] :)

Hopefully that clears the confusion.

Possible Outcomes of My Apple Purchase

Okay, so jcrash and Everyday Finance may disagree with me. That's fine.

But for anyone who is seriously investing their money, please do your own deep and detailed research. Open excel, or your favorite spreadsheet/charting program or write a small script in your favorite programming language and plot the profit-loss-graphs and figure it out yourself - that's the best way to learn this.

Here is the opening two paras from wikipedia :
en.wikipedia.org/wiki/...

A covered call is a process in which one owns shares of a stock or other securities, and then sells (or "writes") a corresponding amount of call options. Payoffs on the stock are always the same, as with a short put option, hence the price (or premium) should always remain the same, as with a short put or naked put.

Writing a covered call generates income, in the form of a premium; however, the risk of stock ownership is not eliminated. Therefore, potential loss is equivalent to subtraction of the total amount paid as premium. Also there is potential upside down through this strategy.


You can also check out cboe.com and read these definitions of synthetic stock and synthetic put :
www.cboe.com/LearnCent...

Synthetic Put
A strategy equivalent in risk to purchasing a put option where an investor sells stock short and buys a call.

Synthetic Stock
An option strategy that is equivalent to the underlying stock. A long call and a short put is synthetic long stock. A long put and a short call is synthetic short stock.

So my understanding seems to be corroborated by wikipedia.org and cboe.com. In the end, your own research is your best option.

Possible Outcomes of My Apple Purchase

So if the stock closes at 19 and opens the next day at 14..how is having a naked-put any different from owning the stock ? Either way you still lost the $5. There is no stopping out in both the cases.

Yes, the put-spread you defined is a defined-risk-defined-r... strategy. And that is way better than both covered-call and the naked-put. But thinking that covered-call is limited-risk but naked-put is not is what is incorrect - since the stock can go to zero - so whether you own the stock or whether you are short-the-put, you lose the same amount of money.

Three Areas of Opportunity for the Bold

The one day difference is surprising - sounds like an arbitrage
opportunity ? :). [maybe it is because of some end-of-day trading differences - which might get wiped the first thing the next day ?]

But anything more than one-day, then it is understandable. The ETFs try to do the two-times-change only on a per-day basis. So in any longer timeframe, the differences will vary.

A quote from a seeking alpha article :
[source : seekingalpha.com/artic...]

For instance, if the Nasdaq Composite Index goes up 10 percent on Monday and then falls 10 percent on Tuesday, the total loss over those two days is 1 percent. The ProShares Ultra QQQ (QLD), however, will rack up a total two-day loss of 4 percent, not 2 percent, as many investors might suppose without a careful reading of the prospectus.

Possible Outcomes of My Apple Purchase

Please read what I wrote again. I said it is ironic that the brokerage firm allows covered-calls but does not allow naked-puts. So yes, they do allow covered-calls. That's what I said too.

Again, I understand the differences. Even with a naked-put, you can also stop out anytime you want, once the stock falls below whatever your limit of pain threshold is.

Also, by buying stock, you have already committed the $9500 but with naked put the brokerage firms would just expect you to keep it there so in case the stock goes to zero, they can take it and be covered. That's all - and again, all the cost of carry, interest rate factors, dividend factors are taken into account when pricing the options.

All I am saying is that both the trades are exactly one and the same - risk and reward wise. You can look at them in different ways and say, in one case, you can say, I am comfortable throwing $9500 first and then capping my upside and then stopping out anytime the stock falls below a particular limit OR you can say, let me just collect premium, but set aside the $9500 that will be the max cap needed and when the stock starts falling, you can stop out anytime saying, enough is enough, I have taken my losses - let me get out of this trade.

And one more thing, if one wants a good return from covered-calls, first off, the basic idea would be to sell the at-the-money option in the front-month - that's the best way to get the long term return.

Finally, to reiterate, there is NO night and day difference between covered-calls and naked-puts. That's precisely the common misconception that I wanted to point out. You can emotionally give them all the difference that you wanted to give it, but mathematically and statistically, they are exactly the same.

Possible Outcomes of My Apple Purchase

Muzie, thanks for writing out all the subtle but important details.

To reiterate if you sell a naked-put for a stock worth $30, the maximum you can lose is $3000 (100 shares per one option). This happens when the stock goes to ZERO.

With covered call, you still *own* the stock, remember ? So if the stock
goes to zero, you still lose all your money (100 shares of the $30 stock).

For any number X between 0 and 30, you lose $3000 - X in both the cases.

In the naked-put case, you offset a small loss by collecting the naked-put premium. In the covered-call call, you offset the small loss by collecting the covered-call's premium.

It is very ironic that even big brokerage firms sometimes don't exactly understand the differences. They allow a covered-call-strategy in your IRA but do not allow a naked-put.

If you are still unconvinced, pick a calculator, excel or write a small program in your favorite language and work out all the possible profit-loss scenarios for all possibilities of the stock price. :)

Number one lesson one learns in options is this :
Long Stock = Long Call + Short Put

[Of course, I am simplifying interest rates, dividends, capital requirements
and all that goodness]

This is very intuitive to understand.
Left side of the equation : long stock.
if stock goes up, you make money.
if stock goes down, you lose money.

Right side of the equation : long call, short put.
if stock goes up, you make money (via long call).
if stock goes down, you lose money (via short put)

If you add the capital requirement part, and the interest rates that you could have earned and the dividend (if applicable), you will arrive at the EXACT same scenario in both the cases. [i mean the theoretical prices of the options - but real market prices will vary slightly but not more than a few cents here and there].

This equation is exactly why the market-makers are able to take the "other" side of any and every trade because they can hedge by doing the _opposite_.

Possible Outcomes of My Apple Purchase

> However, just understand that there's a night and day
> difference between covered call options and naked options.


A long stock plus a short call option (which is essentially the covered-call) has EXACTLY the same risk-reward ratio (or rather is synthetically equivalent) as a SHORT (aka naked) put. :)