Buy call x write a put - what's the difference?

[Mhigasi]

Hi everyone

I'm a newbie and don't really understand the difference between buy a call and buy a call and write a put... Any help must welcomed.

http://ptgmedia.pearsoncmg.com/images/chap1_0131710664/elementLinks/01fig06.jpg

Thank you!

 

[wayneL]

Hi everyone

I'm a newbie and don't really understand the difference between buy a call and buy a call and write a put... Any help must welcomed.

http://ptgmedia.pearsoncmg.com/images/chap1_0131710664/elementLinks/01fig06.jpg

Thank you!

Buy a call and write a put of same strike and expiry is a synthetic long stock IOW the position will behave (when all non-transparent considerations accounted for) exactly like you just went out and bought stock.

A straight out bought call is non linear as per the diagram

 

[Logique]

Be careful.
Take a Call Option - limited losses, potentially unlimited gain
-but-
Write a Put Option - limited gain, potentially unlimited losses

 

[malachii]

Be careful.
Write a Put Option - limited gain, potentially unlimited losses

Surely this can't be right. If I write a naked put I am guaranteeing that I will buy someone's stock at X price. Even if the price crashes to 0 then I can only lose the exercise price of the option less the credit received for writing the option.

eg - If I write a $10 put over XYZ company for 50 cents and then have to fulfill the option - then it would cost me $10 less 50 cents for a total loss of a maximum of $9.50 (this assumes I can't onsell the share for any amount).

Or am I missing something??

malachii

 

[wayneL]

Surely this can't be right. If I write a naked put I am guaranteeing that I will buy someone's stock at X price. Even if the price crashes to 0 then I can only lose the exercise price of the option less the credit received for writing the option.

eg - If I write a $10 put over XYZ company for 50 cents and then have to fulfill the option - then it would cost me $10 less 50 cents for a total loss of a maximum of $9.50 (this assumes I can't onsell the share for any amount).

Or am I missing something??

malachii

No

That is absolutely correct