I’ve been trading both cash-secured puts and covered calls for more than 2 years already.
For a very long time, I’ve been trying to find an answer - Covered calls or Cash Secured puts. Seems I’ve found an answer. At least for myself.
Cash Secured Puts
For a long time, I prefered cash-secured puts (credit spreads) over covered calls - I like cash secured puts as they give that feeling of easy money with protection.
Write a cash secured credit spread, as long as your strike prices are not challenged, you keep the premium.
In case of an assignment, you can always turn into a covered call - the wheel strategy,
Credit spreads give extra protection from steep declines in the price.
Downside - Your max earnings are - the premium you get. There has been a lot of times I’m writing a put option on stocks that have increased in value 4 or 5 or even more times, while I was picking up the pennies from credit spreads.
For example, I was trading credit spread options with TLRY stock when the stock traded $5 per share. I took some $$30-$45 from a credit spread. Fast forward the stock is trading $17 per share. Had I decided to invest in this stock directly and sell covered calls I would make 3-4 times more by selling call options plus the value increase.
Covered calls feel much safer and seem to be giving more. Thus require more capital. A lot more. Anyhow with covered calls, you can benefit both from the premiums and price appreciation over time.
There is this belief or principle among options traders that a covered call should be held for at least a year (tax-effective).
As the stock market tends to go upside, there is a huge chance that stock will increase in value in one year and during the year you will sell covered calls.
If strike prices are challenged - roll up and forward for a credit.
The Bottom Line
Personally, I prefer covered calls more, but I’m not against cash-secured puts. Both of them are great options for trading techniques.
I like entering a trade with cash-secured puts, testing the waters with new stock. I have done this several times with Biotech stocks. If assigned, turn into a wheel strategy by selling covered calls.
What is your favourite options trading strategy? Leave me a comment, readers and me would love to hear!