Selling these two options is a safer options strategy, but it still carries risks
While some investments are riskier than others, each investment vehicle carries its own risks. Not understanding the risks you’re playing with can lead to significant downside when things don’t go your way.
Covered calls and cash secured puts are often seen as ways to boost your income through the positions you already have in your account. In fact, you can crush dividend returns with the help of covered calls and cash secured puts.
I wrote an article detailing the math behind making 6-figures selling covered options which although has its merits, painted a very rosy picture of options trading.
The Math Behind Making $100,000 Each Year Selling Options
I painstakingly crunched the numbers so you don’t have to
While it painted possibilities, it didn’t clearly assess all of the risks. That’s the purpose of this article.
Some people see selling covered calls and cash secured puts as free money, but that is not the case.
Before we talk about risks, I’ll briefly explain the covered call and cash secured put.
For a covered call, you own 100 shares of a certain stock. You decide you have no problem selling it at a certain strike price. You then sell a covered call with that strike price and earn a premium.
For a cash secured put, you put enough money down to buy 100 shares at the price you want to buy it at. Rather than putting down enough shares, you put down enough money to buy 100 shares at your set strike price.
Let’s say XYZ stock trades for $100 per share and you have no problem selling it at $105/share. Let’s say you sell an option that expires in a week and earn $50 in premium.
You get that $50 premium regardless of whether the stock exceeds the strike price or not. If the stock stays under $105/share, you get to keep the shares. However, if the stock goes above $105/share, you are forced to sell your 100 shares.