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Options Theory: Covered Calls vs. Naked Puts

September 30, 2021

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Here’s a fantastic question I received in the Team Phoenix Trading Lab Discord channel:

What do you think would be better? Buy 100 shares of SPY and then sell covered calls, or sell SPY naked puts hoping to get assigned? Naked puts will get you about $2.10 but at a lower price vs a higher price covered call for $3.25. I would like to know the pros and cons of doing both.

I cut a quick video with a comprehensive answer. You’ll find my notes from the lesson below.

Covered Calls vs. Naked Puts

A) Buy 100 shares of SPY and sell ATM covered calls

Or

B) Sell ATM naked puts on SPY in hopes of getting assigned

Naked Puts & Covered Calls are IDENTICAL trades when you use the same strike price.

Well, I don’t usually use the same strike prices.

A) Buy 100 shares of SPY and sell OTM 0.30 delta covered calls (same thing as selling 70 delta naked put)

Or

B) Sell OTM 0.30 delta naked puts on SPY in hopes of getting assigned

Buying stock & selling OTM covered call is the SAME THING as selling an ITM naked put.

Selling OTM naked put is the SAME THING as buying 100 shares of stock and selling an ITM covered call.

Characterization

1) Selling ITM naked put = More Aggressive (i.e., more reward, lower probability of profit)

2) Buying 100 shares of stock and selling ITM covered call = More Conservative (i.e., higher probability of profit, smaller reward)

Should I buy SPY and sell an OTM covered call or ITM covered call?

Should I sell ITM naked puts or OTM naked puts?

Answer? Depends on if you want to be more conservative or more aggressive?

Boomerang Flip Flop from naked put to covered call

1) OTM Naked put = conservative = high POP, lower reward

2) long stock, sell OTM covered call = aggressive = lower POP, higher reward


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