LOS 42.j schweser Long Call option with short Put option

Dear All,

LOS 42.j schweser says

As a generalization long calls are appropriate for strong bullish sentiment,

Long call and short put would make sense for avg bullish

and short put for weak bullish

Are these generalizations correct? I mean why not write a put option along with a call option when market is strong bullish so more chances are that it expires worthless and you just get the premium on put to lower you cost on call. And for weak bullish like the last case put should not be written at all…! Can someone please clarify if I am missing something

Correct

I found that exact part in Schweser text, but not in official curriculum.

I miss something or I don’t understand this.

I will assess probability of making losses on short put higher when I am average bullish compared with the situation when I am highly bullish about the particular stock. This will lead me not to issue a put when average bullish, and issue a put when i am highly bullish.

but if you’re highly bullish, you’d want to own the stock if it goes up rather than just collect the premium. Writing a put can accomplish buying the stock, but only if the option settles ITM which means the stock is below the strike (not very bullish). But if the stock moves above the strike and settles OTM, you as the writer only get the premium. So if you’re highly bullish, you’d want to make sure you can own the stock and participate in the upside - therefore you’d want to buy calls and lock in a floor purchase price if you are convinced the stock is going higher. Going to agree with Schweser here on the degree of bullish-ness of selling puts / buying calls

We have the following from the curriculum. Buying call and issuing put is synthetic long position in the stock… this is equivalent of owning the stock. As you said I would own the stock, when I am highly bullish. From the material in curriculum and your words i quoted I can make an inference: long call and short put (synthetic long position) corresponds to high bullish sentiment.

Let me add this. If I am highly bullish, I believe that the stock will perform good and hence there is little probability of stock price going down. So, I take advantage of it and issue put option, collect the premium. I wouldn’t do this if I am not highly bullish.

Exactly thats the problem!

If I am not missing something important here, I think that part of text in Schewer is not correct. I quickly skimmed over the text in official curriculum, but couldn’t find a similar text to validate that it is correct.

125mph ?

are you with us? or you have what we are missing?

You kind of stated it yourself - if you own the stock and write a put, that is highly bullish. But writing a put by itself is not highly bullish, it is moderately bullish as the return you would receive if the stock price increased is capped at the premium collected vs. if you are long the stock or bought a call. In those two latter cases, the upside is unlimited.

Yes agreed but the question is why not a short put option for the first case (ofcourse with the long call option)

Was responding to thinkwiseandact, not your original question. And to clarify, are you asking why a short put - by itself - is not highly bullish?

I mean for the first case where the market is strong bullish why it suggests only long call in that case… (Why not an additional short put since it is most likely to expire worthless in strong bullish case rather than in case of avg bullish or weak bullish)

[/quote]

I mean for the first case where the market is strong bullish why it suggests only long call in that case… (Why not an additional short put since it is most likely to expire worthless in strong bullish case rather than in case of avg bullish or weak bullish)

[/quote]

Ah, I see - yea, that doesn’t make much sense to me. Would seem to be highly bullish (and frankly logical - like you said, you could offset cost of call w/ put premium). I strongly doubt a question of this format would come up on the test; seems they’d more likely focus on how options strategies are constructed, max profits/losses, etc. And if they did throw something like this at us, you seem to have a good grasp on the mechanics, so could easily work through the problem.