Covered call writing or selling cash-secured puts… which is the best strategy? Well, they both offer great opportunities to generate cash-flow in a low-risk manner. I favor the former in normal to bull market environments and the latter in bear and volatile markets. On June 24, 2019, PCTY passed our rigorous screening requirements to earn its way onto our premium watch list. Let’s look at the initial and final trade results for each strategy for the July 2019 contracts.

 

Price chart for PCTY (Yellow field shows July contract)

 

option-selling price chart

PCTY Price Chart for the July 2019 Option Contracts

PCTY was trading at $97.01 at the start of the contract and closed at $104.84 at contract expiration resulting in successful outcomes for both strategies.

 

Covered call writing with PCTY

 

covered call writing calculations

PCTY: Covered Call Writing Calculations with the Ellman Calculator

Between option premium and share appreciation up to the $100.00 strike, the trade resulted in a 1-month realized profit of 6.3%. Had share price declined, the breakeven would have been $93.91.

 

Selling cash-secured puts with PCTY

 

put-selling calculations

PCTY: Put-Selling Calculations with the BCI Put Calculator

The option premium generated a 2.21% 1-month realized return. Had share price declined, the breakeven would have been $92.95.

 

Summary

Both covered call writing and selling cash-secured puts are outstanding approaches to generating cash-flow in a low-risk manner. In favorable market conditions, we benefit from writing out-of-the-money calls where we can realize share appreciation up to the out-of-the-money strike in addition to option premium. In declining markets, out-of-the-money put-selling will generally result in a lower breakeven, affording us greater downside protection. If the put is exercised, we can continue the defensive investment process by writing in-the-money covered calls.

 

Market update

I am in 50% cash with better-performing stocks as well as Inverse ETFs populating the remainder of my portfolios. I hit several doubles this week always looking to find silver linings in these challenging times. With a strong jobs report, low interest rates (with more reductions to come) and favorable earnings, I am solidly bullish longer-term once we pass the coronavirus issues.

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