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I think it may be misnamed... in what sense are the puts covered except
by your savings?
If you sold short and then wrote puts on top of that, that might be
more aptly termed a 'covered put', since you'd collect the put premium,
and in the event of a decline in price, the loss you'd suffer on the
put(s) would be partially or completely offset by the gain you'd receive
from the short(s). This would be the symmetric opposite of a 'covered
call'.
It sounds like you've got a naked put and a long... that's a leveraged
bet that the price will go up.
/Jim
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re: .1
>I think it may be misnamed... in what sense are the puts covered except
>by your savings?
Yes, the put is covered by cash, analogous to a call being covered
by shares of stock. If a call is exercised, you are obligated to
deliver stock, if a put is exercised you deliver cash.
>If you sold short and then wrote puts on top of that, that might be
>more aptly termed a 'covered put', since you'd collect the put premium,
>and in the event of a decline in price, the loss you'd suffer on the
>put(s) would be partially or completely offset by the gain you'd receive
>from the short(s). This would be the symmetric opposite of a 'covered
>call'.
Well sort of. Except that selling short has potentially unlimited risk
if the stock increases in price. It'd be a weird thing, but there's
nothing to keep a $10 stock from going to a million+ stock. So your
risk in selling short and writing a put is infinity minus the put
premium. The risk in writing a covered call is limited to the share
value minus the call premium.
If you just use cash to cover the put, with no short selling, the
risk is the cash minus the put premium. Therefore I suggest that this
scenario is the opposing counterpart of a covered call.
-r-
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RE: .0
Calls can be sold:
- by owning the stock and selling the covered calls against the stock
owned
- by buying a lower strike price calls and selling higher priced
calls, or buying a longer expiry date calls and selling a shorter
expiry date calls. These are covered calls.
- "uncovered" or "naked", using the cash or other securities to
meet the margin requirements
Similary, puts can be sold
- by selling the stock (short or already owned as against the box) and
selling the puts with the striking price lower than your selling
price so that if they are exercised you can use it to cover or
replenish the stock which you already sold
- by buying a higher strike price puts and selling lower priced
puts (see Example 1), or buying a longer expiry date puts and
selling a shorter expiry date puts (see Example 2).
Example 1: Buy March 45 puts and sell March 40 puts. You
are covered here. If the stock price falls below
$40 and the March 40 puts which you sold get
exercised, you can always exrcise the March 45 puts
which you bought. You get the difference of $5,
minus the price you paid and the commision. If the
price of the stock remains closer to $40 (just above
$40), your March 45 put will still be worth something,
but the one you sold will be worthless at expiration.
If the price stays closer to $45, or above, you lose.
Example 2: Buy July 45 puts and sell March 45 puts. Again,
you are covered here. Your hope here is that at
the March expiration date, the puts you sold
will be worthless (you can let it expire or buy
it back, and sell April 45, do the same for next
month, etc. if the same situation continues).
- "uncovered" or "naked", using the cash or other securities to
meet the margin requirements.
Hope this clarifies. Again, there are inherent risks in these and there
is no assurance that you would make profit all the time. The stock
price may move in the wrong direction and you may lose!
/P.B. Bhat
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