Our journey began with understanding covered calls and how using a covered call stock screener could help in making the right decisions.
You can read all about it here.
Once the basics are cleared, we can talk about how covered calls are different from cash-secured puts and which of these is better. That said, there are also a lot of similarities between the two strategies.
Let’s dive into the details.
A covered call is a strategy through which you can sell a call against shares of stock you own or purchase simultaneously. If you’re willing to sell the shares when the stock rises, then covered calls are perfect for you. Also, the option premium received from the call sale is a great way to boost the income from your portfolio.
Implementing this risk management strategy will earn you a premium, but you forfeit your stock’s profit potential beyond the strike price of the call.
Traders use covered calls for income when they believe that the stock will not experience any major fluctuations in the upcoming months.
This is an options strategy through which a seller can enter a short put position and earn a premium. Different from covered calls, cash-secured puts require the seller to purchase the underlying stock if the buyer of said put option were to exercise it.
When a put option is exercised, it means that the long put position will have to sell the stock to the short put position at the strike price.
So, when is the put option usually exercised?
In a scenario where the underlying stock price drops below the predetermined strike price, the put option will likely be exercised. OptionDash’s cash secured put screener can help you sort through all the market data to find income-producing put trades that meet your criteria. With our proprietary scoring system and advanced screening criteria, optionDash will help you make sound decisions.
That said, if you’re just starting to learn about options, you should consult an investment professional to learn more and see if covered calls or cash-secured puts are appropriate in your situation.
The “Cash-Secured” aspect of the trade means you have the funds on hand to purchase the shares if the price drops below your strike price. If the option were to be exercised, you need to have enough funds to fulfill your obligation. Common uses for cash secured puts include increasing portfolio income without owning the actual stock or buying more shares if the market price declines.
There are three main similarities to focus on:
Using a covered call stock screener can help determine the necessary aspects of the trade. Choose optionDash today!
The difference between these two strategies can be divided into a few parts to get a better hold of the details. Today, we’ll be discussing five of these.
On the other hand, a cash-secured put is written by someone who wants to acquire underlying stocks after assessing their chances thoroughly. If the price of the stock were to remain above the strike price during the option’s life, then the investor could miss out on purchasing the stock. This means the investor would lose upside potential if the share price moves higher.
A covered call is written if you already own the stock or want to purchase it. It provides a cash cushion if the stock price were to drop. There is a possibility of losing an upside if the share price moves above the strike price of your call option.
With a cash-secured put, you can only have one income stream, i.e., through premium. Selling cash-secured puts is a neutral strategy, but you might have a more bullish opinion on the stock. The difference between bullish and bearish strategies is based on the profit-making potential, exposure, and the future direction of the price on the selected stocks.
A covered call could make you money on the option, as well as on the stock’s appreciation. This will depend on whether or not an out-of-the-money strike call option is sold. Most Covered call traders are neutral to slightly bearish on the position.
Most brokers allow you to trade both covered calls and cash-secured puts in retirement accounts. However, they may require a different Trade Level. Trade Levels protect account holders from placing high-risk or prohibited trades in certain account types. To trade options, you will need to sign your brokers’ option agreement and request the appropriate Trade Level for your desired option strategy.
Since you own shares of stock when writing covered calls, you will receive dividend payments if you own the shares on the dividend ex-date. Keep in mind, dividend payments are one of the most common reasons for the option buyer to early exercise the call.
The bitter truth for those who sell puts is that you cannot collect dividends. But, you will be rewarded with higher premiums for the short put position when the ex-dividend date falls before the expiration date.
By now, it should be obvious that covered call writers would be on the lookout for stocks whose prices are stable or rising at a slow rate. It is only after assessing the market and their risk tolerance that they select a stock. It does not make sense to sell a covered call if you are extremely bullish on a stock.
Someone who is price sensitive will lean towards selling cash-secured puts. If a stock is appreciating at price, put sells can repeatedly collect premium without the cash outlay of purchasing shares. Selling puts is also a great way to make additional purchases at a lower valuation. When executed well, this strategy would allow the investor to invest in stock below the market rate. To ensure you don’t lose any money, use tools such as our cash-secured put screeners.
We’ve understood that both the strategies have a similar reward-risk profile, meaning each of them has its own set of benefits vs. disadvantages for investors.
Ultimately, the more you study the market and understand it, the higher are your chances of earning a profit and identifying the best option strategy for the situation.
Unless you want to own the underlying stock, you can opt for a cash-secured put to boost income in your portfolio. Fewer transaction costs will boost your returns over the long run. Take a look at optionDash, a screener for all income investors.Posted in Covered Call Screener |