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Cash-Secured Call Options

One of our favorite option-selling strategies is selling cash-secured puts. This involves selling (usually out-of-the-money) put options and securing the possible future contract assignment with the appropriate amount of cash. What about cash-secured call options also referred to as cash covered call options? This latter strategy is quite different from traditional covered call writing in both trade execution and goal. Although this is not one of our go-to option-selling strategies, some of our members have inquired about it so I decided to publish this article to explain how and why it is considered by some investors.

 

What are cash-secured call options?

  • Call options are purchased, giving the option holder the right, but not the obligation, to buy the shares at the strike price by the expiration date
  • Cash is set aside in an interest-bearing account to purchase the shares should the option-buyer decide to exercise the option

 

Goals of the strategy

  • Setting a maximum price for a stock we are interested in holding for the long-term (lower price of the stock or strike price at expiration)
  • Create an opportunity to reconsider stock purchase during the life of the contract

 

Breakeven and maximum loss and gain

  • The breakeven price is the strike price + option premium cost
  • The maximum loss is the price paid for the call option
  • The maximum gain is unlimited

 

Hypothetical example

  • Stock BCI is trading at $61.00
  • Buy the $60.00 call option for $3.00
  • Bullish long-term on the stock
  • Breakeven (BE) = $$60.00 + $3.00 = $63.00
  • Maximum loss = $3.00

 

Various outcomes at contract expiration

 

call option

Outcomes for Cash-Secured Call Options

 

Stock price is $65.00 at expiration

We have a $2.00 benefit over our BE. Had we purchased at $61.00, our benefit would have been $4.00, $2.00 better.

 

Stock price is $63.00 at expiration

This is our BE price so no benefit is realized. Had we purchased at $61.00, our benefit would have been $2.00, $2.00 better.

 

Stock price is $60.00 at expiration

This is $3.00 below our BE and represents our maximum loss (blue cells highlight maximum loss possibilities). Had we purchased at $61.00, our loss would have been $1.00, $2.00 better.

 

Stock price is $55.00 at expiration

This is $8.00 below our BE but we would allow the option to expire worthless rather than exercise the option. After expiration, the stock can be purchased at $55.00, if still bullish on the security or we can re-assess our evaluation of the stock and move to a new one. This also represents our maximum loss. Had we purchased the stock at $61.00, our loss would have been $6.00, $3.00 worse than using the cash-secured call strategy.

 

Discussion

The cash-secured call strategy is used to purchase a stock at the lower of the call strike or current market value, thereby guaranteeing a maximum price while also giving the investor a chance to re-assess the bullish assumption during the life of the contract.

 

Recent Money Show interview

Click to listen

 

Your generous testimonials 

Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:

Alan,

I thought I knew about covered call writing but you have opened up a whole new world for me.

Thanks,

Louis

 

Upcoming event

July 22: Chicago Traders Expo

All Stars of Options

1:30 – 2:15

Hyatt Regency McCormick Place

 

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Market tone data is now located on page 1 of our premium member stock reports.

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

15 Responses to “Cash-Secured Call Options”

  1. Omar June 15, 2019 2:03 am #

    Hi Allen,

    New member here. Great website with great info……However, I need your opinion on couple items

    1. If a stock drops from the watch list and I already have it as a covered call, do I sell it regardless?

    2. Since I am starting this coming Monday, do I select random stocks that are in bold from different sectors?

    3. I Can’t decide if I should use the dow 30 list for June or select from the watch list? Which one do you use? I have tolerance for high volatility.

    your opinion is much appreciated,

    Omar

    • Alan Ellman June 15, 2019 6:34 am #

      Omar,

      Welcome to our premium member community.

      My responses:

      1. No. If a stock is in our portfolio but drops from our watch list, we manage it according to the exit strategy arsenal detailed in my books and DVDs, not by its removal from our watch list. Now, if we sell a stock and need a replacement stock, we use the most recent BCI report.

      2. All the stocks in the white cells are eligible (assuming adequate option open interest) but the ones in bold have the strongest technicals. Favoring the stocks in bold is a reasonable starting approach but not a requirement.

      3. I use the stock watch list for my portfolios and the ETF report for my mother’s. There is no right or wrong here. For a higher (but still conservative) personal risk-tolerance, the stock report watchlist is appropriate. For more conservative investors, the ETF and Dow 30 (Blue Chip) reports should be considered.

      Alan

      • Hoyt T June 15, 2019 6:02 pm #

        Welcome to our group, Omar.

        I think you will find the Reports that come with Membership provide a full range candidates for writing Calls and Cash Secured Puts. Even if your investing strategy evolves to encompass more nuanced options trading the Watchlists and Reports will save hours of research time. Each of us develop combinations of strategies based on our risk tolerance levels. The more experience and skill you obtain what used to appear as high risk may now appear as moderate risk.

        As you gain experience and skill, features like Beta and Implied Volatility will work as screens to help you pick the underlings that give you a greater possibility of generating the return appropriate to your risk tolerance level.

        In selling Calls and Puts it’s important to remember that it’s the time value that comprises your profit. In ITM calls Intrinsic Value only serves as downside protection to the point of the strike price. In OTM Calls if the stock rises to or above the strike then you would have gotten the rise to the strike price anyway. Exit strategies are to maximize time value. The farther away from ATM, either deeper ITM or farther OTM time value decreases.

        When I was younger and more risk tolerant I would screen for very high time values. I was lucky for awhile, then I became cocky and got my clock cleaned. Now I follow the BCI methodology more closely.

        We can also learn from each other’s experience here on the blog.

        Good luck Omar and, again, welcome aboard.

        Hoyt T

        • Marsha June 16, 2019 6:55 am #

          Alan and Hoyt,

          Outstanding information with your responses. I learn so much on this site.

          Thanks.
          Marsha

  2. John June 15, 2019 4:55 am #

    When you are writing covered calls on etfs…qqq spy xlf…, do you take in account earning reports or can you write covered calls year round?

    Thanks,
    John

    • Alan Ellman June 15, 2019 6:47 am #

      John,

      One of the advantages of using ETFs is that earnings reports are not a concern so we can use them year round. That said, ex-dividend dates are still a concern if retaining the shares is a portfolio requirement (this is not a requirement for me). As an example, QQQ had a recent ex-date on March 18th and, since it generates 4 dividends per year, has a projected next ex-date around June 18th.

      To sum up: Earnings report are not a concern for ETFs and ex-dividend dates can be if retaining the shares is a critical portfolio requirement.

      For more information on ex-dates, check out this article I published last year:

      https://www.thebluecollarinvestor.com/early-exercise-due-to-dividend-capture-theoretical-and-practical-applications/

      Alan

    • Jay June 15, 2019 2:44 pm #

      Hi John,

      Unfortunately it seems the older I get the lazier and more simple I get in addition :). Yet that can be a wonderful thing when it comes to investing!

      I now use only ETF’s in my investment portfolio overwriting some portion each month to avoid individual stock risk and earnings dates altogether. I accept the likely lower returns in exchange for typically less volatility and no need to churn holdings or over trade.

      I think the best part of the strategies we discuss here is their flexibility. My hunch is after some run time, some trials, some errors, some wins and some loses we all settle into the stride that suits us best. – Jay

      • Hoyt T June 15, 2019 6:55 pm #

        Hi Jay,

        I, too, get lazier. I think it’s only human that we fall into “pattern” trading. That is, after a time, our trading begins to fit a pattern. We look for the same”pattern” in our search for candidates etc. And that’s ok as long as it works.:)

        If you had to pick five stocks to avoid at all costs I’d bet two of them would be UBER and BYND. Over my most recent Thursday evening drinking sessions with my drinking pals I have empathically stated that I wouldn’t own them under any circumstances.

        Well I recently bought 100 shares of UBER and sold ATM Calls and made money. Didn’t see that coming. Then last Tuesday I made the decision that the lack of gravity in BYND had to be short covering. So on Wednesday, 06/12/19, with BYND at $142.44 I bought $143.00 Calls expiring 06/14/19 for $6.49. By the close I was underwater. Thursday I remained underwater. On Friday the Calls shot up to $15.00. Unfortunately due to a death in the family I was tied up Friday morning until about 11:30am. By then the Calls were bouncing between $7.50 and $9.50. Somewhere shortly after 2:00 I sold at $11.00. They went higher and then lower and closed around $8.47.

        I ended up making 67.25%, excluding fees and commissions. While I bask in this glory I try not to remember the many times when I went underwater and stayed underwater.

        BTW at 10:26am on Friday Barrons dropped an article entitled, “Beyond Meat Stock Shot Higher Because Short Sellers Lost Big Time”. According to the article more than 51% of the free float of stock had been sold short and the premium the shorts were having to pay for the stock was as high as 100%. The article is a must read for any investor who wants to be better informed even if they would never short a stock.

        It was like I fell face down into a cow pie and ended up with a strawberry in my mouth.:)

        Even a broken clock is right twice a day.

        Take care and good luck.

        Hoyt

        • Jay June 16, 2019 9:43 am #

          Hey Hoyt,

          Great stuff with Uber and BYND! In general I stay away from IPO’s for a while to let them settle but there is no disputing the fact one can make a lot of money on the ones you get right! I think BYND stock was up 400% at one point and heaven knows how much an alert and lucky call buyer might have made :)?

          And whereas I try to keep my investing fairly stable and systematic and am “lazy” there I am aggressive and do a little of everything on the trading side of options. It’s just me but I consider selling CC’s & CSP’s and buying/selling LEAPS part of investing, not trading. For the latter I mean the various options buy speculation, verticals, diagonals and calendars I might have open at any given time. Most of those for the next two weeks are bearish. I plan to turn more bullish for July given normal seasonality and if something positive comes out of the G20 on the trade debacle.

          I am starting to get nervous about what this fall will bring. So many issues that have real time deadlines and implications for the market all come to a head and my confidence in the cast of players in Washington is low. – Jay

  3. Hamish June 15, 2019 5:41 pm #

    Alan

    Could you please take the time to through my question about the differences between CCW and Cash-Secured Put Selling?
    So far, I have had a lot of success using covered call writing and I have been teaching and recommending it to other people who want to become financially independent. Since I’m from Belgium, we unfortunately face a huge amount of taxes when trading stocks (buying and selling stocks means we have to pay 0.35% of the share value every time, so 0.70% if we purchased the stock and sell the stock).

    Luckily, the premiums from selling options doesn’t undergo those setbacks. Now, my question obviously is: when selling OTM puts we generate a premium without owning the stock. So, we’re leveraging our cash position in order to be prepared if we get assigned. Now, for Belgian investors (including me) that sounds like music to their ears since we don’t have to purchase a particular underlying security to generate cash.

    In one of your videos, you’ve mentioned that put selling doesn’t offer you upside potential whereas covered call writing gives the shareholder the opportunity of generating a second income stream beyond the initial premium. But what about selling an in-the-money put to benefit from potential share appreciation knowing the probability of getting assigned is significant when we sell the option? If the price goes well above the strike price we capture the full premium.

    Thanks for your thoughts on this matter.

    Best
    Hamish

    • Alan Ellman June 16, 2019 7:28 am #

      Hamish,

      I am not a qualified tax expert in any country but I will take a shot at this question, responding in general terms:.

      Let me make sure I have this right…

      If we buy and sell a $100.00 stock, we would pay a tax, in Belgium, of $0.70? If this is accurate, it would not be enough of a liability to motivate me to change a strategy which has worked well for me over a significant time frame.

      Now, if the tax is significantly higher, then selling cash-secured puts would make sense. I would still stick with out-of-the-money puts because we do not want to take possession of the shares and using in-the-money puts enhances the possibility of share assignment. So, we would be trading off a high-tax liability in exchange for share appreciation profit opportunities in this hypothetical.

      Once again, a tax of .7% for buying and selling a stock should not cause us to eliminate a strategy that has worked well for us.

      For both strategies, we must also be prepared for our entire arsenal of exit strategies when these opportunities present themselves.

      For a complete comparative analysis of covered call writing versus selling cash-secured puts, see pages 213 – 229 in my book, “Selling Cash-Secured Puts”.

      Alan

      • Hamish June 16, 2019 7:57 am #

        On the other hand, less exit strategies with put selling.

      • Hamish June 16, 2019 8:28 am #

        Thanks Alan for your quick well-thought-out answer. Maybe I could only sell OTM calls if I’m bullish on the security and sell OTM puts to replace ITM calls. That last approach would be applicable in bearish markets and would vanish some of the taxes.

  4. Barry B June 15, 2019 10:14 pm #

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor premium member site and is available for download in the “Reports” section. Look for the report dated 06/14/19.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    http://www.youtube.com/user/BlueCollarInvestor

    Best,

    Barry and The Blue Collar Investor Team

    Edit

  5. Scott June 16, 2019 10:28 am #

    Hi Alan,

    I have a question about stock selection. I recently read where you mentioned that is was a good idea to close a position when there was significant share appreciation, rather than roll up. In the past I had always rolled up, with mixed success. I believe the idea is to avoid profit taking, which could bring the stock down a bit. I did this recently on payc, selling at 228 and closing the 210 option, which was essentially maximized. Clearly this worked out great as payc has fallen to 214.

    On Friday, I did the same thing closing maximized positions on glob (90 strike) and veev (155 strike). However, my dilemma or question arises when I look at today’s report. Both veev and glob are on the list, in bold. So now I’m questioning whether these should have been rolled up rather than closed out? I can see that both are above 80 on the slow stochastics indicator.

    Are these likely to pull back or are these prime candidates for new investments? Any advice on making this decision would be great.

    Thanks, Scott

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