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Up0
Guys, I am going through the chapter on Risk Mgmt.applications (one of the last chapters of the last book), specifically, the derivative combinations and suddenly realized the following.
Covered Call (long asset + short call) payoff diagram looks the same like a Short position in a Put.
Similarly, Protective put (long asset + long put) looks the same like a Long Call.
Why do these strategies exist? Why doesn’t one simply go for the respective option instead? Comments anyone?
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Up4
Prosper- u are correct, they are the same. They’re synthetics. Lots of synthetics using options. One would use synthetics to capture better value. For instance- if options are skewed to one upside, with calls being way more expensive than puts. One could buy puts and buy stock rather than buying expensive calls. Or if stock is tough to borrow, one could buy put and sell call and synthetically short the stock. for a better understanding of skew look at a biotech w/ an upcoming pdufa….upside gets silly expensive
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Up1
Basically the whole point of a covered call is to make extra revenue from selling options (doesn’t matter call or put in this case).
The investor has a neutral view on the long asset (it means the price of the asset is very stable or the volatility is low), hence selling call or put options that will never get exercised (assuming the investor’s view is correct).
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