Covered Call, Protective Put tricks

burning0spear

any tricks for remembering payoff/breakeven for protective put and covered call?

Micholien

covered call is long stock and short call

fiduciary call is long call and long risk free investment

Beatnik

i understand that...covered call is long stock, long call. fiduciary call is long call, long t-bill.

I am asking about covered call. max gain, max loss, breakeven. same for protective put.

sgupta0827

This is some great feedback...thanks guys. After nuppal's post, i will never forget put-call parity again!!!!

My main concern is remembering the following:

covered call: max gain= x - s + premium, max loss = s - premium paid, breakeven= s - premium paid

protective put: max gain unlimited, max loss s-x+premium paid, breakeven = s + premium

It is weird...I cannot remember these when they come up in questions. i fully understand the individual option payouts, but when it comes to combining them, I blank. I'll spend 5 minutes drawing arrows and thinking this stuff out, but wind up reversing a sign or something. Some of them make sense intuitively, but others are just pissing me off.

Any good acronyms or logic behind thinking these out would be greatly appreciated.

ftwcfa

It's not covered call in the equation, it's fiduciary call they are different things.

bluejazzy

Okay, seriously.

First, think of a protective put in its natural sense. You own the underlying and you want insurance against downside risk without forgoing upside gain. So, the right side of the equation is: Long the security, long the put. (So, P + S)

Then, a fiduciary call is what's left: Long the call (for upside benefit) and long treasury bill equal to the strike price. (So, C + X)

Hence: C + X = P + S

The X is always discounted at the risk free rate. This means that if S = X (the stock is trading at the strike price), C must be MORE than P by the risk free rate.

- Robert

hariRaj

Slutty
+
Prostitutes
=
Blow
+
C@ck

__________

"good personality ... or he was known as Lt. Mandingo during his army days."

invic

Well here's a trick to remember Put-Call Parity.

Think of this phrase: "Sip a coke".

SiP a CokE


Stock + Put = Call + Bond with Face Value of Exercise Price.