Without factoring in interest earned on the balance of money when just buying the call and the without selling calls at lower strikes, creating credit spreads and requiring additional margin, the total loss on the call option is 100 percent but is only (1260/10200) 12.3 percent of equity when the stock dropped.

The 2 methods in your example seem to be equal to me and this doesn’t account for the extra commissions using the radioactive method and the wide bid ask spread on the long put if you decide to sell it instead of exercising it. What am I missing?

What Kurt has discovered will never been understood by most people because most people are just clouded by the traditional theory. Even the theory is wrong, nobody has the gut to correct it.

I will be his follower for the rest of my life.
He discovered something way more important than he realized from his explanation.

Remember, option is always option. It can never be stock.
A boy can never do a man’s job. It is as simple as that.

Thank you, kurt for enlightening me in this subject.

_________1000_shares_Married_Put___17_long_calls
_________Price_____Profit_/_Loss___Price_____Profit_/_Loss
____________12.33_______($390.00)_____12.33________($391.00)
____________14.76_______($390.38)_____14.76________($391.00)
____________17.32_______($389.79)_____17.32________($391.00)
____________19.88_______($390.19)_____19.88________($391.00)
_______________20_______($390.00)________20________($391.00)
____________20.39___________$0.00_____20.23____________$0.00
____________22.44_______$2,050.40_____22.44________$3,757.00
_______________25_______$4,610.00________25________$8,109.00

Thanks
Dennis

True… one does not HAVE to over-trade… but remember we are dealing with people here, and human error or weakness can enter into the picture.

The primary reason (I’ll list several others below) that I teach using a married put is that it FORCES position size. Yes, you can trade a long call AND make a deposit, AND not touch it for any reason during the duration of the trade, or open any other long calls… but who does that? The married put forces one not to overcommit his/her capital.

As to the commissions, I place my orders with OptionsXpress to buy stock and a put, and end up paying only one commission for the entire position.

Here are a few other good reasons that I favor married puts over long calls:

1) Adjustments are easy. If I were to sell a near term call against a long call, or sell a bear call spread against my long call, or do any number of my co-called “Income Methods” (adjustments at a net credit), I’ll need to pony up margin anyway. If I own 100 shares of stock for each short call however, I am always covered so I don’t ever have to think about margin requirements.

2) Trade clearance is relaxed. This is a common concern: can I do this trade in an IRA? Many adjustments to a long call CANNOT be done at most brokers without a higher trade clearance. Paradoxically, these adjustments would be safer, done correctly, than a covered call trade.

Take the example of Income Method #6: Selling a Bear Call Spread. WHen you own 100 shares of XYZ, and have the clearance to buy long puts… well, you have the clearance to buy long calls also.

I recently showed a Blueprint owner how they might trade a bear call spread in their Schwab IRA: She owned 300 shares of RIMM and could buy to open Jan $75s, while selling to open Jan $70s. The short calls are treated as a covered call because she owns the stock.

Later, to expand her trading clearance she may truthfully state on an application that she has experience trading spreads, even though Schwab did not treat it that way. It was a covered call, plus a long call! All in a put-protected stock.

3) Price Break. Depending on a stock’s put/call ratio, as well as other factors… It may be significantly better to buy a stock and put than to buy a long call.

The reason is that part of the call’s pricing is the consideration that one could alternatively buy stock OR a long call and put the rest into an interest bearing account. Buying the stock and put may result in a price break that equates to having been paid the interest up front.

I show this rather plainly in a video on youtube at http://www.youtube.com/watch?v=D0tQk-QIBRE

and it pretty much floors everyone that wants to say that a long call and a married put have IDENTICAL risk.

Now, I know that to get the money back out we have to sell the stock and put… or do we? Near term calls can be shorted against the arrangement, capturing premium that’s inflated over what a near term put and stock would yield.

Clear as mud? Naw, check the math as well as the theory. You’ll find that there are opportunities to get an edge.

Not that I’m talking about an arbitrage opportunity… one COULD use the example in the video (ESRX married put premium of $7.35 and long call premium of $8.30) for arbitrage, but find out in the end that they had only solved Black-Scholes for the risk free interest rate.

Yes, I use a married put for an edge on the buy side, but it’s still a directional trade. And one that I CAN’T enter into too many contracts if I don’t have the capital. Which brings us back to the primary reason I prefer married puts over long calls: FORCED position sizing.

L.S.:

No, the trade you have described becomes a synthetic straddle, with short calls. WAY different risk picture.

Happy Trading to you both!

Kurt

Fingers got out of sync with mind

Sorry