Covered Call Definition

Covered call vs put option

Covered call vs put option


Just as with a call option, you can buy a put option in any of those three phases, and buyers will pay a larger premium when the option is in the money because it already has intrinsic value.

Cash-Secured Puts Vs. Covered Calls - Option Party

Since the strategy involves shorting a stock, a margin account (not a cash account) is required with a high level of trading approval, much higher than that required for covered call writing.

Options Strategies: Covered Calls & Covered Puts | Charles

A covered put investor typically has a neutral to slightly bearish sentiment. Selling covered puts against a short equity position creates an obligation to buy the stock back at the strike price of the put option.

Covered Puts Versus Covered Calls

Option Party gives you the tools to compare stock option strategies and make more effective decisions based on probability of success.

Although covered call and cash-secured puts may have the same risk-reward profile, each strategy boasts of various advantages to investors with different risk appetites.

If you trade at a broker where the extra commission of a covered call matters then you should be looking for a lower cost broker. If you trade in stocks that pay dividends then you probably want to limit yourself to covered calls.

The most you can lose is your net debit per share. Your net debit is the price you paid for the stock ($87) minus the amount you received for the call option ($8), or $79/share. If XYZ stock becomes worthless by expiration you could lose $79/share. Same as in the naked put case.

Let us discuss two options strategies a lot of investors may think are similar. Investors are correct to assume these strategies are similar in many aspects, but they are not exactly the same. This article focuses on Cash-Secured Puts and Covered Calls. We define each strategy individually, and then how they are different from each other.

Same scenario: XYZ is selling for $87/share. You buy 655 shares and sell a 85-strike call option for $8 (which is $7 of intrinsic value and $6 of time premium , since the option is 7 points in the money at the time you sold it).

It is only worthwhile for the put buyer to exercise their option (and require the put writer/seller to buy the stock from them at the strike price) if the current price of the underlying is below the strike price. For example, if the stock is trading at $66 on the stock market, it is not worthwhile for the put option buyer to exercise their option to sell the stock at $65 because they can sell it for a higher price on the market. 

Chicago Board Options Exchange. 89 Options Quick Facts - Equity Calls & Puts. 89 Accessed July 7, 7575.


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