Understanding Covered Calls and Cash-secured Puts
Options trading involves the ability to buy or sell a security at a predetermined price within a specific time frame. Covered calls and cash-secured puts are common strategies in options trading, offering potential opportunities for generating income while managing risk. By selling covered calls, you receive premiums in exchange for owning at least 100 shares of the underlying security. On the other hand, selling cash-secured puts involves receiving premiums for accepting downside risk with reserved funds in your account. These strategies provide ways to capitalize on market movements while protecting your investments.
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Presentation Transcript
It is the ability, but not the obligation, to buy or sell a security at a given price (strike price) within a predetermined time period. There are two sides to options trade contracts -Buying of contracts -Selling of contracts (writing) 1 contract = 100 shares of underlying security Monthly options expire every 3rdFriday of the month
Selling Covered Calls -You receive money today (premium) in exchange for your stock s potential future upside -The money is yours, regardless if the option is exercised on or before the expiration date -The position is covered because you own at least 100 shares of the underlying security
DHR $80 on June 25th August 18thoption chain Strike Price $85 $90 Premium per 1 contract = 100 shares $2 $1 Earnings release date: August 30th
The stock price goes down.. The stock price goes up, but doesn t reach strike price . The stock price exceeds the strike price .
6/25 8/18 Potential Opportunity Forfeited Opportunity $80 $85 $90 Strike Price
Selling Cash-secured Puts -You receive money today (premium) in exchange for downside risk. -The money is yours, regardless if the option is exercised -The position is cash-secured because the money must be in reserves within your account
DHR $80 on June 25th August 18th option chain Strike Price Premium per 1 contract = 100 shares $2 $1 $75 $70 Earnings release date: August 30th
The stock price goes down.. The stock price goes down, but doesn t reach strike price . The stock price exceeds the strike price .
8/18 6/25 $80 Overpayment Potential savings $70 $75 Strike Price
Options can be used to provide income to your existing portfolio or reduce cost basis while waiting for anticipated price movements. Cash-secured Puts can be used similar to limit orders to secure stocks at a lower price basis. Covered Call Video
