SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Options Equivalent Positions


One of the interesting features about options is that there is a relationship between calls, puts, and the underlying stock. And because of that relationship, some option positions are equivalent – that means identical profit/loss profiles – to others.

Why is that important? You will discover that some option combinations – called spreads – are easier, or less costly to trade than others. Even with today’s low commissions, why spend more than you must?
 

The basic equation that describes an underlying and its options is: Owning one call option and selling one put option (with the same strike price and expiration date) is equivalent to owning 100 shares of stock. Thus,
 

S = C – P; where S = stock; C = call; P = put


If you want a simple proof that the above equation is true, consider a position that is long one call and short one put. When expiration arrives, if the call option is in the money, you exercise the call and own 100 shares. If the put option is in the money, you are assigned an exercise notice and buy 100 shares of stock. In either case, you own stock.

NOTE: If the stock is at the money when expiration arrives, you are in a quandary. You don’t know if the put owner is going to exercise and therefore, you don’t know whether to exercise the call. If you want to maintain the long stock position, the simplest way out is to buy the put, paying $0.05, or less, and exercise the call.


 Example of options equivalent positions

 There is one equivalent position that you, the options rookie, should know because these are options spread trading strategies you are likely to adopt.

Take a look at a covered call position (long stock and short one call), or S-C.


From the equation above, S –C = -P. In other words, if you own stock and sell one call option (covered call writing) then your position is equivalent to being short one put option with the same strike and expiration. That position is naked short the put. Amazingly some brokers don’t allow all clients to sell naked puts, but they allow all to write covered calls. The world is not always efficient (you already knew that).


Thus, writing a covered call is equivalent to selling a naked put. This is not a big deal to anyone who is an experienced option trader, but to a newcomer to the world of options this can be an eye-opener.


The more you trade options, you more you will become aware of other equivalent positions. You may even decide to play with the equation yourself and discover others.

 

If you are new to the world of options, today's discussion of options equivalent positions may appear to be a bit confusing.
But if you go slowly and re-read the linked posts, you’ll understand the discussion.

 

If you’ve been trading options for a while and never bothered to learn about equivalent positions, this post contains information that can make your trading more efficient.

Here is summary of some recent blog posts:

 

  • Some option positions are equivalent to others, and covered call writing is equivalent to writing naked puts.
  • To significantly reduce the risk of writing naked puts, turn it into a credit spread by buying a put that is further out of the money than the put sold.
  • Collars are a good, conservative strategy for any conservative investor.

Let’s take a closer look at a collar, which consists of three legs: long stock, long put, short call. ZZY is trading at $67 per share and you want to collar that stock. To do that you may decide to write one Dec 75 call and buy one Dec 60 put.

 

Separating the collar into two parts:

 

Collar: Part One

 

Part Two

  • Long 100 shares of ZZY          
  • Long 1 ZZY Dec 60 put
  • Short 1 ZZY Dec 75 call

Part one is a covered call position, and we know that a covered call is equivalent to being short the put with the same strike and expiration.

 

The collar, part one is equivalent to:  Short 1 ZZY Dec 75 put

 

The collar, part two is:  Long 1 ZZY Dec 60 put

 

This position is a put credit spread (short a put and long a put with a lower strike price).

 

So what, you ask? This is proof that the collar position is equivalent to the put credit spread – but only when the put owned is the same and the put sold has the same strike and expiration date as the covered call.

 

If the conservative approach offered by collars appeals to you, consider selling the put credit spread instead. First, there are fewer commissions to pay, and second, the put spread is easier to trade because there are only two legs in the position, instead of three.

 

NOTE to more experienced traders: The collar is also equivalent to buying the bull call spread, when the strike prices and expiration date are the same as the puts that are part of the put credit spread. In other words, buying the ZZY Dec 60/75 call spread is equivalent to selling the ZZY Dec 60/75 put spread.

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Subscribe

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Long Straddle Options Strategy: The Ultimate Guide

    A long straddle is an options spread that involves the simultaneous purchase of a put and a call at the same strike price and expiration date. It’s a long-options, market-neutral strategy with limited risk and unlimited profit potential.

    By Pat Crawley,

    • 0 comments
    • 225 views
  • Ready to Invest? Here's How to Get Started with Online Trading

    I am struggling with making the decision to get started.  How much money do I need to be efficient and effective following your instructions?  What software and where to find it?  I could really benefit from extra income but I am also in a position where I can't really afford to lose much so there is some doubt/fear.  But, your information and attitude felt right to me so I reached out.

    By Karl Domm,

    • 0 comments
    • 191 views
  • The Importance  of Proactive Hedging in Options Trading

    Investing in the stock market can be a daunting task for even the most experienced investors. With the constant fluctuations and volatility of the market, it can be difficult to predict the future direction of the market. This is where options trading comes into play.

    By Karl Domm,

    • 0 comments
    • 296 views
  • The Silent Bank Run

    Long before Silicon Valley Bank failed, the banking sector was experiencing a silent bank run. Unlike the Great Depression, where lines of people clamoring for their money were blocks long, this silent bank run, as its name portends, has been out of sight until recently. There are a couple of reasons for this. 

    By Michael Lebowitz,

    • 0 comments
    • 225 views
  • High Probability Strategy: A Holy Grail of Options Trading?

    A lot of options traders consider a 90% probability strategy a Holy Grail of trading. After all, if you can win 90% of the time, you should be able to grow your account very quickly, right? Well, not only this is not necessarily true, but in fact, a Winning Ratio alone tells you nothing about your chances to be profitable.

    By Kim,

    • 0 comments
    • 233 views
  • The 10 Best Options Trading Books

    Options trading can be challenging. I look at it as a journey, a long term investment, which is no different that graduating from University. And like University, you need to do a lot of reading, along with a lot of practicing. Fortunately, there are a lot of books out there that can be of tremendous help in this journey.

    By Kim,

    • 0 comments
    • 350 views
  • OptionNET Explorer (ONE) Software

    OptionNET Explorer (ONE) is a complete options trading and analysis software platform that enables the user to backtest complex options trading strategies, analyze their results and monitor them in real-time, all from within a single, user friendly environment. 

    By Kim,

    • 0 comments
    • 336 views
  • Delta Hedging Your Options Strategies

    All traders begin with an introduction to call and put options.  However, it's rare (apart from short puts) that an experienced trader would use these contracts by themselves. Instead, we primarily trade options spreads. There are many benefits to spreads. The variety of spreads are targeted to various market criteria and market environments.

    By Drew Hilleshiem,

    • 0 comments
    • 9,283 views
  • What Happened to SFO Magazine (SFOMag)? Stocks, Options and Futures Magazine

    Remember SFO Magazine? Traders like Jack Schwager and Brett Steenbarger used to write for the publication before its swift shutdown in 2012. What happened. SFO (Stocks, Futures, and Options) magazine was a monthly financial magazine focused on trading and investing in stocks, futures, and options markets.

    By Pat Crawley,

    • 0 comments
    • 1,150 views
  • How to Use the Finest Covered Call Strategy

    Investing in the stock market can be a great way to grow your wealth over time. However, it can also be a volatile and unpredictable place, with sudden swings in stock prices causing anxiety for even the most experienced investors. This is where the covered call strategy comes in - a popular options trading strategy that can help manage portfolio volatility.

    By Kim,

    • 0 comments
    • 858 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido