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The profit-loss diagram for the "long stock, short call" position and the "short put" position are almost exactly the same, except that for the former, you may be able to profit more when the stock goes up as, in addition to the premium collected from selling the option, you also get to profit from capital gains and dividends from ownership of the stock. Additionally, you are able to allow for a greater decrease in the stock price before you start incurring a loss. However, to take two positions, there may be more transaction costs compared to just taking a "short put" alone. Are there any other pros and cons that I have not considered?

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  • $\begingroup$ Try asking on money.stackexchange.com. Some users there are very experienced with options. I think you'll get good answers there. $\endgroup$ – Flux Sep 1 at 12:51
  • $\begingroup$ @Flux Thanks for the advice! I will try it. $\endgroup$ – Tan Yong Boon Sep 1 at 21:10
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The primary consideration in practice is that the initial investment is larger if you are long the stock, and thus consumes more balance sheet.

The next consideration is that if you don’t hold to maturity, the implied volatility exposure is opposite (and the associated greeks) for the positions.

After that, there are only voting rights, jurisdiction-dependent tax issues, and the reality that one instrument might be mis-priced.

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  • $\begingroup$ So what is the primary benefit of a "long stock, short call" over a "short put"? $\endgroup$ – Tan Yong Boon Sep 1 at 11:23
  • $\begingroup$ I fixed the answer. Risk exposures are different if you don’t hold to maturity. After that, there things like voting rights. $\endgroup$ – Brian Romanchuk Sep 1 at 11:36
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If:

The profit-loss diagram for the "long stock, short call" position and the "short put" position are almost exactly the same

then it is impossible

that for the former, you may be able to profit more when the stock goes up as, in addition to the premium collected from selling the option, you also get to profit from capital gains and dividends from ownership of the stock.

A short put is synthetically equivalent to a covered call where both are have the same strike price and expiration. The dividend is priced into the options as it increases put premium and decreases call premium. The same holds true for the carry cost (it decreases put premium and increases call premium).

Disadvantages of the covered call are:

  • It ties up more capital

  • It involves more commissions (if you're still paying them)

  • There's more B/A slippage if you need to exit the position

  • If the position is successful, the short put will expire whereas the covered call will be assigned (your broker may charge a fee for this).

As a simple hypothetical example, Suppose XYZ is $55. To make the calculations easy, assume that the carry cost is zero and there is no dividend. Here are the two choices:

  • Buy XYZ today and sell the Nov 20th 60c for $1

  • Sell the Nov 20th 60 put for $6

Run through every expiration scenario for both of these positions, What is the loss at 45? At 50? Do you see the break even at 54? How much is the gain for each position above above 60?

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