Covered Calls and Cash-secured Puts
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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 3rd Friday of the
month
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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
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DHR $80 on June 25th
August 18th option chain
Strike Price
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Premium per 1 contract = 100 shares
$85
$2
$90
$1
Earnings release date: August 30th
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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
$80
8/18
Potential
Opportunity
$85
Strike Price
Forfeited
Opportunity
$90
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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
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DHR $80 on June 25th
August 18th option chain
Strike Price
Premium per 1 contract = 100
shares
$75
$2
$70
$1
Earnings release date: August 30th
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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
$70
6/25
Overpayment
$75
Strike Price
Potential “savings”
$80
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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