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Covered call vs. cash-secured put
Understand covered calls and cash-secured puts, the decision it supports, and the pricing and execution risks to check before acting
Prepared by Mark · Primary sources below
Direct answer
A covered call combines long shares with a short call, while a cash-secured put combines a short put with cash reserved to buy shares if assigned. Their expiration payoffs can resemble each other at equivalent strikes, but starting ownership, cash flows, dividends, and account experience differ. The covered call gives up stock upside above the call strike and keeps substantial downside in the shares.
Covered calls and cash-secured puts: the core structure
A covered call combines long shares with a short call, while a cash-secured put combines a short put with cash reserved to buy shares if assigned. Their expiration payoffs can resemble each other at equivalent strikes, but starting ownership, cash flows, dividends, and account experience differ.
Covered calls and cash-secured puts: the variables to compare
The covered call gives up stock upside above the call strike and keeps substantial downside in the shares. The cash-secured put can acquire shares at the strike less premium but still faces stock-like downside after assignment; compare desired ownership, effective basis, yield calculation, and tax or dividend context.
Covered calls and cash-secured puts: the risk that remains
Premium received does not protect against a large stock decline, and early assignment can alter timing. Check ex-dividend dates, buying power, liquidity, concentration, the willingness to hold or sell the shares, and an exit plan before treating either strategy as income.
Common questions
What does covered calls and cash-secured puts help explain?
A covered call combines long shares with a short call, while a cash-secured put combines a short put with cash reserved to buy shares if assigned. Their expiration payoffs can resemble each other at equivalent strikes, but starting ownership, cash flows, dividends, and account experience differ.
What should I check before using covered calls and cash-secured puts?
The covered call gives up stock upside above the call strike and keeps substantial downside in the shares. The cash-secured put can acquire shares at the strike less premium but still faces stock-like downside after assignment; compare desired ownership, effective basis, yield calculation, and tax or dividend context. Premium received does not protect against a large stock decline, and early assignment can alter timing. Check ex-dividend dates, buying power, liquidity, concentration, the willingness to hold or sell the shares, and an exit plan before treating either strategy as income.
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