What are covered calls and cash secured puts?

Covered Call

A covered call is an options strategy where you sell a call option on a stock you already own (Long Stock + Short Call). One contract usually represents 100 shares.

This strategy is used when you expect the stock to stay roughly the same or rise slightly. By selling the call, you collect a premium, which provides extra income while still keeping the benefits of stock ownership.

The trade-off is that your upside is limited: if the stock price rises above the strike price, you must sell the stock at the strike, limiting your profit. On the downside, you still face the risk of a falling stock, although the premium provides a small buffer. Covered calls are mainly used to generate income from stocks in a neutral to slightly bullish market.

Requires Level 1 options approval.

• Maximum gain: (Strike Price of Option - Stock Purchase Price + Premium) x 100 shares = ($14- $10 + $2) x 100 shares = $600

• Maximum loss: Stock falls to $0. (Stock Purchase Price- Premium) x 100 shares = ($10 - $2) x 100 shares - premium received = $800

• Break-even: (Short Call Option Strike Price - Premium) = $10-$2 =$8

Cash Secured Put

A cash-secured put is an options strategy where you sell a put option, while keeping enough cash in your account to buy the stock if the option is exercised (by the buyer). Typically, one contract consists of 100 shares. Unlike a covered call, you do not already own the stock. This strategy is used when you are willing to buy the stock at a lower price and expect it to stay neutral or rise slightly. By selling the put, you receive a premium, which provides income and partially reduces risk.

If the stock stays above the strike, the option expires worthless, and you keep the premium. If it falls below the strike, you are obligated to buy the shares at the strike price, effectively entering the position at a discount ,compared to the then prevailing price, thanks to the premium received.

This strategy generally requires Level 1 options approval and a moderate risk tolerance.

• Maximum gain: Limited to the premium received. Premium*100 shares. = $3 * 100 shares = $300

• Maximum loss: Occurs if the stock price drops to zero; c(Salculated as the strike price - the premium received) *100 shares. = ($8-$3) * 100 shares = $500

• Break-even point: Strike price - the premium received. = $8 - $3 = $5