An accepted myth is that covered call writing and selling cash-secured puts are precisely the same strategy. The reason this statement is generally accepted by many investors is that they have the same risk-reward profiles or profit and loss graphs:. In this article, other similarities will be discussed as well as some distinct differences between the two strategies that will debunk the myth that they are precisely the same strategy.
Covered call writers share owners collect corporate dividends, put-sellers do not. Covered call writers can capture both option premium plus share appreciation if out-of-the-money strikes are sold. Put-sellers capture option premium only. Covered call writers buy the underlying security in share increments. Covered call writing works best in slightly bearish to bullish market conditions.
Put-selling is best suited for slightly bearish to neutral market conditions. Covered call writing is universally allowed in IRAs while put-selling is allowed only by certain brokers.
Most brokerages require a higher level of trading approval for put-selling because they feel that it is not as intuitive as is covered call writing. This is not an issue for covered call writing assuming no tax issues because we know our cost basis. For a declining stock, early assignment of a short put may result in a greater loss since notification may not come until the next trading day. It will be much less expensive to close a short call than a short put.
This is because call value declines with a decrease in share price while put premium increases with a decline in stock price. This will require us to set aside a greater cash reserve to buy back a short put on a declining security. In bear and volatile markets, put-selling can be used before buying a stock. This creates an additional layer of downside protection in challenging market conditions.
In this same regard, put-selling can be used in lieu of setting limit orders when there is a desire to buy a stock but at a lower price than current market value. Covered call writing and selling cash-secured puts have the same profit and loss graph profiles but also differ in many ways. By understanding the similarities and differences between these two option-selling strategies, each investor can make the most appropriate decisions as to when and how to implement these strategies.
Global stocks boasted solid gains this week, as major US indices set new records and European stocks enjoyed their best week since February. Despite the bullish nature of the market since the election, I would still like to see the economic and global policies of the incoming administration more precisely defined.
To send us an email, contact us here. Subscribe to our e-mail newsletter or RSS feed to receive updates. Contact us by phone at Additionally you can also find us on any of the social networks below:. I have found these two strategies work well in concert. More often then not I am better off entering positions through cash secured puts and then starting my call writing.
Of course, that was pre-Trump: The market cut me a little slack yesterday morning. I like the stock and would not mind owning it. Never sell a cash secured put unless you feel that way.
But that is not the initial tactic I chose for this position. If RF keeps running, great! I will buy back the puts at a fraction of what I was paid, log a nice income trade and do it again.
If the market takes an unexpected turn, always temporary, I am in a good stock at a better price than if I had bought it yesterday.
And then I start my call writing campaign. So my experience suggests using both put and call selling in your trading never second guessing one over the other. I agree with the brokerages. Cash secured puts feel less intuitive, and somehow more risky. The big difference to me is the fact that it feels easier to unwind a trade gone bad.
In my trade above I will not own RF until it goes down over 7. I warmed up to cash secured puts when I started thinking of them as getting paid to place limit orders I would have bought anyway. Sometimes I just buy. I use a blend. Your points are well made: Have a great week! Sorry it showed up right below your post, I should have waited for other posts before submitting mine.
Further, on cash secured put selling and other more advanced trades, I hope that in the future I will be able to learn and use them. Right now I had to reduce my trading time, because I had to return to work 2 days a week: The severe recession in Brazil is giving us my partners and me a very hard time.
Have a nice week too — Roni. We have added additional indicator to the Weekly Premium Report this week. A ratio of 1 tends to indicate a bearish trend.
In your put book chapter about the PCP strategy you show out of the money puts. Do you ever use in the money or at the money with this strategy? I generally use put-selling in bear and volatile market conditions in much the same way Jay described his RF trade above. I use out-of-the-money puts most of the time.
Now, if one were using put-selling to buy a stock at a discount in lieu of a limit order, ATM and ITM puts are more appropriate because the chance of exercise is greater. This to me is an equal to or even higher risk than ER when we are making such short term trades. This is such an important question because there is actually a way to detect many of these rumors or major events outside earnings reports that can impact share price without spending dozens of hours a week researching rumors on all eligible securities.
The answer lies in the implied volatility of the underlying security. The big boys dictate option-pricing based on their research and perhaps information not available to us. We let them do the legwork and simply view option pricing. All we need to do is look at option returns for near-the-money strikes based on stock price. If we see an extremely high ROO…stay away…something is up. We can research from there, if interested. In my material, I suggest setting an initial return goal based on personal risk tolerance.
When I see a chart with an unusual chart pattern, I immediately check the news. The Blue Hour 3 recording from December 1st is now available on the member site. Login and scroll down on the left side. The first two Blue hour webinars are also available in that same area.
But, prior to expiration this confuses me for the following reasons:. The only logical thing my tiny brain can muster here would be that it is intended to wait for assignment and then write against it again the PCP strategy. The specific strategy referenced in your question is found on page in the 3rd paragraph from the top:. I share your concern about writing both calls and puts on the same stock without actually owning the underlying but that is not what the chart intended.
Writing the call implies that we decided to accept assignment when stock news was not egregious and we opted to write calls to continue the cash flow. We also have the other choices listed in the book and flow chart. You make an excellent point but our system protects us from these unusual scenarios. So what does it mean when we see high volume and very low delivery as it relates to stocks?
This usually falls into one of 3 categories:. Stocks that are day-traded usually are volatile stocks with a risky story or event that makes this type of trading worthwhile to investors with high risk-tolerance. These scenarios would result in high premiums implied volatility and most conservative investors would be concerned regarding the high premiums…see my response to Jim above. So I want to ask a brief question on this first, with my last others thrown in there too: But now 2 weeks later I just happened to be on a recent premium report, and saw that there is one.
So I am guessing it would be a good idea to keep checking each weeks premium report, just in case there is a dividend date added or deleted during the contract, so in case of early exercise? Also is this MCU strategy a hardened rule we should go by? If at mid-contract I calculate it not being worth doing a MCU, but then the stock continues rising in the following days, then would you not allow maybe another days or whatever to keep trying to do a MCU, so to go to a replacement stock?
And on that last question, I have actually just found another stock for this Last weeks contract, after closing out the last one as price was up quite high. Have a great Xmas for you and family, and thanks too for all the help you have shown me this whole year. Will be back next year for learning more too! When entering a trade, it is definitely okay to explore all strikes with adequate OI and B-A spreads that meet your initial return goals.
The most likely scenario for early exercise would be if:. If not, I leave the position and re-evaluate as expiration approaches for possible rolling opportunities. Applied materials is a leading equipment supplier to the global semiconductor industry. The only blemish on the report was a slight shortfall in revenues.
The company has beat earnings consensus in 5 of the past 6 quarters. See the bullish chart pattern under this comment.More...