Covered Calls and Cash-secured Puts Options Covered Calls and Cash-secured Puts

What is an option? 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

Options Strategy 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

Covered Call Example DHR $80 on June 25th August 18th option chain Earnings release date: August 30th Strike Price Premium per 1 contract = 100 shares $85 $2 $90 $1

Covered Call Outcomes The stock price goes down….. The stock price goes up, but doesn’t reach strike price…. The stock price exceeds the strike price….

Covered Call Illustration 6/25 Strike Price 8/18 Potential Opportunity Forfeited Opportunity $80 $85 $90

Cash-secured Put 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

Cash-secured Put Example DHR $80 on June 25th August 18th option chain Earnings release date: August 30th Strike Price Premium per 1 contract = 100 shares $75 $2 $70 $1

Cash-secured Put Outcomes The stock price goes down….. The stock price goes down, but doesn’t reach strike price…. The stock price exceeds the strike price….

Cash-secured Put Illustration 8/18 Strike Price 6/25 $80 $70 Overpayment $75 Potential “savings”

Conclusion 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