Option Trading Concepts to Help You Build a Solid Foundation

10. Equivalent Positions

A "covered write" is a position consisting of an asset and a short call on that asset. Stock market investors often use "covered writes" to generate additional income on their long stock portfolio and to provide a partial hedge against a decline in their stock. Can traders of commodities and futures also use "covered writes?"

Certainly they can, however, traders of futures don't usually intend on holding a portfolio of long contracts. They're speculating on short-term market movement and they get in and out of positions more frequently than stock market investors. So selling a call against a long futures contract isn't really done to generate income; it's done to reduce downside exposure.

As a strategy that stands on it's own merits (that is, buying a futures and selling a call), it makes little sense for futures traders. Why? Because it's simpler and more cost effective to merely sell a put. The purchase of a futures contract and the sale of a call, for example, is equivalent to the sale of a put having the same strike price as the call. So a trader can save a commission and deal with slippage on only a put rather than on a call and on the futures.

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