Covered calls vs Short against the box

I was asked whether you could buy a stock and short it at the same time.

This is my answer from All Experts.com,as it was a private question so my answer was not available to the public.


Your theory is called shorting against the box.

You are simply hedging your long position by selling against it.

The bad thing is that if you hold through a dividend period

You will have to pay the dividend on your short position.

The advantage of 1 account is money,if you plan to sell short,most bokerages require you have the cash to cover the entire price.

Now my prefered way is to do a covered call.

Using a leap call option thats simply a call option good for 2 years.
Recently I could have sold a covered call on some hpq.

If I had when the stock was 50,

I would have pulled out 50 cents on the dollar when the market crashed

If i had bought leap puts with the procedes from the sale of the covered calls.

I would have made 1.12 for each buck the stock dropped and had no worries about paying any dividends on my short/covered position,since its a stock option

It has been my experience that a leap put goes up amost 62 cents on the dollar,when a stock is falling.

While the leap call goes down 50cents on the dollar.

Since you sold the call as a covered position,you must buy it back to close the position.

So as the option devalues as the stock drops,you make a profit,
and the put goes up in value thus further increasing your profit.

So its your choice.

Short against the box or simply sell a covered call.

My preferance is the covered call.

My best reason to cover is this. Say you want to buy a 5k of stock and you only have 3500,you now have a 1500 margin call or loan if you choose to borrow.

If you cover the position, the procedes from the option sale will be applied against the margin balance.

I once bought 4k of stock for 3k and covered 5 bucks out of the money.

ie For a 20 buck stock 200 shares cost 4k.

I sold 2 calls that were 25 buck strike for 1k and spent 3 k of my money.

When the options expired 2 years later the stock was 35 a share and i was exercised.

I received 5k for my sale plus the 1k I had received for the leap calls I covered with.

So i made 6k total return on a 3k investment

ie I made 100% return in 2 years or 50% return a year.

Thats my kind of trade.