Long Calls vs. Married Puts Revisited AGAIN!

Here is an email dialogue I had with someone regarding the EQUIVALENCE of married puts and long calls…

Kurt Frankenberg Writes:

I recently got a letter from one of our valued subscribers in India.

He saw the RadioActive Trading materials and perhaps got some input elsewhere. He wrote to me about the similarity between a long call and a married put.

Today I’ll be dispelling the confusion between the two. Contrary to the rantings of more than a few pundits, there are SEVERAL advantages that can be gained by trading married puts (stock that you own, PLUS a put option for protection) versus buying a long call.

V Responds:

the only advantage i see is it gives you a way to dazzle your subscribers with bs.

Kurt Frankenberg Writes:

If you haven’t looked at the methods by way of one of our webinars, or gotten The Sketch or Trade Simulator Tool (all free), then you probably don’t know the bs in the world of options education from the good stuff.

I invite you to give it a good look. If you’re unhappy, unsubscribe! I’d hate to waste your time and mine.

V Responds:

actually I have attended several webinars and we have emailed on this subject before. stock + put still = call. I see what you are doing and I guess its smart. in this world of overabundance of newsletter writers trying to sell their wares I guess you need a new hook to make yourself look different to the newbees.

the more advanced have figured out put call parity a long time ago. think about this. if two equivalent option positions diverged there would be an arb opportunity. do you think arb opportunities go unfilled on wall street?

Kurt Frankenberg Writes:

THIS arb opportunity goes unexploited on Wall Street because the same result can be achieved by buying T bills.

The arb opportunity I’m referring to of course is the practice of buying the stock and a put and shorting the call, or buying the call and shorting the stock and put. There IS a difference that equates to an arb opportunity but since it is virtually the same as the risk free interest rate, it goes untouched.

No, the reason I teach married puts to the masses is because of the natural human tendency that ALL traders have to overleverage themselves. You could buy a call and put 95% of your capital in an interest bearing account, OR buy stock and a put and have the same position.

For someone that is converting their stock positions, the latter makes the most sense. For folks converting their THINKING from buy and hold… or covered calls… the latter is also an easier trip to make. I’m in the business of teaching traders the behavior that loses them money: overleveraging. And with that lesson I also give the solution: hedging.

By the way, in no way do I ever hold back the information that a call PLUS capital on deposit is synthetically equivalent to a married put. Somehow or other folks that teach “calls are more efficient” seem to get their pupils in trouble sooner or later. That’s not the aim or the outcome of The Blueprint.

V Responds:

“No, the reason I teach married puts to the masses is because of the natural human tendency that ALL traders have to overleverage themselves.”

I will agree there a difference here. I sell a lot of naked puts. the same tendency is a problem with that stradegy. it works so well for a few months that it looks like a sure fire money maker so why not do twice as many. that is the month the market lowers the boom on you.

Kurt Frankenberg Writes:

That’s right! Your broker (and mine) will NOT allow you to get into too many contracts with put-selling because you’ll have to secure them with a certain amount of cash or margin. By having margin requirements, the broker FORCES you not to take on too many positions, e.g., 1000 short puts at the $500 strike on Google. They require you to “trade within your means” and thereby keep themselves first, then you, out of trouble.

The brokers don’t care, on the other hand, how many long call contracts you buy. If you have the trading clearance to buy long calls, you may over-leverage to your heart’s content. And because of the human tendency that we both agree on… this is where so many options teachers get their pupils into trouble.

So the married put is a way for my subscribers to “force” themselves into good money management principles, the same way that brokers force you and me NOT to trade too many contracts: by requiring a high amount of capital on hand for each contract. The fact that a married put is synthetically equivalent to a long is TRUE… so long as that long call is accompanied by a deposit of capital.

The end lesson of RAT is NOT what is best: long calls or married puts… but rather what proportion of money management is best. It’s just easier to “put” it into practice by FORCING one’s capital into a safe place rather than have all that tempting “buying power” still in the account, crying “buy calls, buy calls!”

Thanks for the dialogue, V! I hope that you can see why I do what I do. I think that I’m keeping more folks out of trouble than my competitors because virtually no one teaches responsible position sizing… but trading a married put FORCES the issue. You get 100 shares, 1 put contract rather than being tempted to buy 17 long call contracts with the same money.