Learn to value a stock · Day 26 of 28

Covered calls and cash-secured puts: the trade-offs

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Key idea: Both strategies collect premium in exchange for giving something up: big gains in a covered call, protection from falls in a cash-secured put.

A covered call means owning 100 shares and selling a call against them. The holder collects premium now. In exchange, if the share rises above the strike, the gains above it go to the call's buyer. It trades away big gains for steady income.

A cash-secured put means setting aside enough cash to buy 100 shares at the strike and selling a put. The seller collects premium. If the share falls below the strike, they must buy the shares at the strike, even if the price has collapsed.

Neither is free money. Both limit the gain while leaving most of the downside of owning the shares. In calm markets they look like steady income; in sharp falls or rallies the trade-off shows.

Before any options strategy, compare it with the simple alternative: just owning the shares, or just holding cash, after the bid-ask cost from Day 25.

Quick check

Someone owns 100 shares at $40 and sells a covered call with a $45 strike for $1. The share jumps to $60. What happens?

Compare strategies with the options strategy selector →

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