beginners corner

Comparing ITM Calls and OTM Puts in Bear Markets

Covered call writing and selling cash-secured puts are both outstanding low-risk strategies that can outperform the overall market on a consistent basis. I am on record as favoring covered call writing in normal to bull markets and include put-selling in bear markets. In normal to bull markets, covered call writing gives us the flexibility to use out-of-the-money (OTM) calls which provides the opportunity to 2 income streams with the same trade, one from call premium and the other from share appreciation from current market value up to the OTM strike. In bear markets, selling OTM puts generates similar premium returns as calls and, in many scenarios, allows us to purchase the stock at a slightly lower cost-basis than had we sold a covered call should the put get exercised. It’s a close call but I give a slight edge to put-selling in bear markets.

Real-life example with ZTO Express Inc. (NYSE: ZTO)

With ZTO trading at $23.29, we will look at selling the $22.00 ITM call and $22.00 OTM put. We are assuming a bear or volatile market environment where we are willing to accept an initial modest time-value return in return for greater downside protection.

ZTO call-put option-chain for 5-week returns

ZTO Call and Put Option-Chain

ZTO call calculations with the Ellman Calculator

ZTO Call Calculations Using the Multiple Tab of the Ellman Calculator

ZTO put calculations with the BCI Put Calculator

ZTO Put Calculations

Analyzing calculation results

The initial time-value returns are similar (1.2% for calls and 1.15% for puts). The intrinsic-value of the call option ($1.29) buys down our cost-basis from $23.29 to $22.00. If the put is exercised, the 6.61% discount results in a cost-basis of $21.75 ($22.00 – $0.25), slightly lower than that of the covered call (a 1.4% advantage).


In normal to bull market environments, covered call writing offers the benefit of potential 2 income streams per trade when using OTM call strikes. In bear markets, OTM puts will generate similar initial time-value returns but frequently allow us to own the underlying security at a slightly lower cost-basis if and when the put is exercised.

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:

Hi Alan,

I really like your style. I can tell that you have a huge understanding of options and you present the material very clearly and in an organized fashion. I’m also convinced that you are truly honest, not always the case with premium membership systems. So, thanks again for that.


Upcoming events

1. February 6th – 9th 2020 Orlando Money Show

3- Hour Masters Class Saturday February 8th 1:45 – 4:45 PM


Information to follow

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7 PM – 9 PM

Plainview- Old Bethpage Public Library

Covered Call Writing Blue-Chip Stocks to Create a Free Portfolio of Large Tech Companies

New events added this week

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Market tone data is now located on page 1 of our premium member stock reports and page 8 of our mid-week ETF reports.



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.

34 Responses to “Comparing ITM Calls and OTM Puts in Bear Markets”

  1. Lisa February 1, 2020 4:11 am


    Do you think the institutions will likely ‘pin the strike’ when you see Open Interest at such huge numbers like 65,000? see screenshot.

    Does this lead you to be more likely to choose such a strike vs one with simply several thousand Open Interest?

    Thanks in advance for whatever your reply may be.

    Best wishes,


    • Alan Ellman February 1, 2020 7:31 am


      Your question reflects an impressive knowledge of options.

      “Pinning the strike” applies to high open-interest options as expiration approaches when the stock price is close to the option strike.

      When we sell options, we are selecting the strikes based on our “moneyness” decisions and initial time-value return goal range. We do require a minimum open-interest or liquidity threshold but we do not select underlyings based on option open-interest.

      Here is a link to an article I published 7 years ago that relates to this topic:


  2. Murali February 1, 2020 5:56 am


    I am a beginner to option trading.

    I want to do cash secured puts and generate income in my traditional IRA.

    I am ok if they turn into assigned do that I can sell covered calls next day.

    Does BCI membership provide guidance which stock/etf I can go sell cash secured puts?

    What should I watch for?

    What are best practices?

    Any guidance very much appreciated.


  3. Patrick February 1, 2020 6:03 am

    Hi Alan,

    Hope all is well with you. I promise not to flood your inbox with countless requests to check my work but this being my first attempt at an exit strategy, I was hopeful you would review my work with me. And I’m sorry I didn’t follow your directions and paper trade first. I was sure I knew what I was doing so I went live. Time to paper trade for a few months.

    Last week I sold 1 (NTM) MS 2/21 $55P for 1.23 (I sold near the money because I thought the market would hold up.) Initial return 1.23/5377=2.9% Break even stock price 53.77 I followed the 3% rule and bought to close the position at 2.80 (stock went ITM) Net loss is 280-123=157/5377=2.92%

    Is this all correct? If so this is almost a wash and the cash is now free to get in to another position. Having said that, I might wait a bit. The market seems uneasy right now.

    Also I think I will try to establish a paper trade account to solidly your video and book lessons. I’m determined to get this and I know I need to master the three fundamental steps to selling calls and puts.

    One final question, I find it brutal to do all this work and give 35% away in taxes. I’m still hopeful we will eventually be allowed to trade options in our 401K at work. By then, with any luck I’ll know what I‘m doing. My question is do you know if there is a tax free college education account I could establish? I’d like to use this account to send my kids to college and that is rapidly approaching. If not I either need to accept the 35% hit or roll this account in to a self directed IRA. Any thoughts or opinions you have would be most welcome. Have a great day and hope to see you soon at one of your seminars.

    Kind regards,


    • Alan Ellman February 1, 2020 7:57 am


      Paper-trading is an excellent preliminary step, I agree. You may want to test deeper out-of-the-money puts unless you are using the strategy to buy a stock at a discount and want that stock in your portfolio sooner rather than later. I tend to sell OTM puts to enter my covered call trades in bear and volatile markets. The more concerned I am about the market, the deeper OTM will be the strike selected.

      All of my self-directed IRA accounts are populated with my option-selling trades. These represent short-term capital gains.

      I am not a tax expert and not qualified to respond to tax-related questions but I’m happy to share with you where I prefer to trade options.

      It would be my pleasure to meet you personally at one of my live seminars.


  4. Steve February 1, 2020 7:44 am

    Thank you Alan for your responses. Very gracious of you and I don’t expect a response from every message.

    I’m taking quite a beating this week as probably most of your students are. Going to evaluate the situation on Monday. That will be my week 3 of a 5-week contract. Four of my six calls have been closed with the 20% rule. Hoping to be able to roll down but also hoping that things may bounce back and I could hit a double on some of these ETFs.

    Any insight on this crazy week we’ve had would be helpful or any educational content you can suggest for me to go listen to I’d appreciate it. Have a great weekend!


    • Other Steve February 1, 2020 8:06 pm

      Hi Steve,

      It makes me feel a little better to know I’m not the only one. The virus was just a blip on my radar when I entered my positions aligned with a bullish market, just a couple days later my sentiment was turning bearish. I’m also hoping to hit a double and just get out of one position that’s been rolled way down.

      I’m new here too so I haven’t ‘been around’ long enough to guess what the market will do next. I have noticed though, as Alan mentioned in his books that some lower beta stocks are doing well in the harsher conditions, GOLD and FNV for example. I’ll definitely be considering moving to these kinds of stocks if things don’t turn back around.

      Other Steve

    • Alan Ellman February 2, 2020 8:39 am

      Both Steve’s,

      It is critical to take emotion out of the process whether the market is moving up or down substantially. Concerns about the coronavirus has taken a still fundamentally sound market along with a bumpy but decent early earnings season resulting in a downturn of the market. Let’s call it a consolidation where the market is flat for the year (-0.16%).

      If earnings continues in a positive direction and with negative interest rates in Europe, where is it most likely for a significant percentage of international money to flow. A strong case can be made for US equities.

      Last week, the 20% threshold was met for several of my positions and I’m ready to take advantage to either “hit a double” or roll-down depending on market action in the mid-portion of the February contracts.

      Bottom line: No emotions allowed.


      • Steve February 2, 2020 11:56 am

        Thanks for the feedback Alan! I needed that! Enjoy your super bowl Sunday!

      • Sunny February 4, 2020 10:01 am


        You wrote:

        “Last week, the 20% threshold was met for several of my positions and I’m ready to take advantage to either “hit a double” or roll-down depending on market action in the mid-portion of the February contracts.”

        For me this is the hardest part, to choose between “hit-a-double” and rolling-down… If I remember correct you favor rolling down in last weeks of the contract.

        Let’s say I bought the option back for $0.20 and it’s selling at $0.30 now. I assume such price is still too low for “hitting-a-double”?

        Do you have any guidelines when resell the option to “hit-a-double”?


        • Alan Ellman February 4, 2020 12:34 pm


          I favor rolling-down in the final 2 weeks of a contract especially the 2nd from last week.

          As far as what amount justifies “hitting a double”, I say cash is cash. I’ll take the $30.00 per contract if that is the price on or before Friday. Time-value erosion is accelerating so we can’t wait too long.

          When I do roll-down on an appreciating stock, I will try to roll-down to an OTM strike.


  5. Barry Bergman February 1, 2020 9:34 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 01/31/20.

    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:

    Since we are in Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:

    IMPORTANT NOTE: The report for next week, 02/08/20, will be published sometime on Monday, 02/10/20. Alan and I will be in Orlando for the 2020 Orlando Money Show. As a result of the time we’re at the show, I won’t be able to get the report out as usual.


    Barry and The Blue Collar Investor Team

    [email protected]

  6. MarioG February 2, 2020 4:49 am


    Thought I would comment on you post from last week when you mention you have been selling naked Puts and question what is the criteria to select selling Puts versus Covered Calls.

    Alan responded to your post explaining his strategy and some selection thoughts..

    If when you sell your Puts your broker debits (reduces your cash available to trade) your account for the value of your Strike x Contracts x 100, then you are really selling Cash Secured Puts as defined by Alan’s strategy. Naked puts would mean the broker is not reserving any cash and expect you to provide the cash it if the sold Put is assigned and you purchase the stock.

    Regarding CSPs and Covered and learning about Alan’s strategy, did spend 4 months studying Options, initially reading thoroughly Alan’s Classic Vol. 1 Encyclopedia book and other books from the local library, then reading later Alan’s Cash Secured Puts book. Even then as I made my first covered call trades, I had to refer to his writings again to understand his exit strategies for the several scenarios that occur.

    Another important source of information is the powerful Google search in Alan’s website. Others have asked similar questions over the last 5 years that I have been on the system.

    Good luck in your trading.


  7. Alp February 2, 2020 7:51 am


    I sold puts on Visa and it is no longer recommended.

    What do you recommend someone does when a stock is on the list one week … then disappear removed to no longer recommended

    Should the position be closed? for puts sold

    • Alan Ellman February 3, 2020 6:55 am


      No. When a stock is removed from the “eligible” section of our watch list, current positions with that equity are managed as detailed in my books/DVDs. If we enter new positions, those are selected from our most recent premium stock or ETF report which have the most updated information.


  8. Ed February 2, 2020 1:51 pm


    How does the BCI system perform when some big negative news eruption like coronavirus hits and the market tanks while in the middle of the month (mid-trade)?


    • Alan Ellman February 3, 2020 7:07 am


      One of the strengths of the BCI methodology (in my humble opinion) is that our system addresses any and all scenarios including the one you describe. Now, this does not mean that all situations will end up winning trades but it does result in mitigation of losing trades and enhancements of winning ones.

      Unexpected bad news like the coronavirus is our enemy. If we have our 20%/10% guidelines in place for calls and watch for our 3% guidelines for puts, we have opportunities to decrease current losses or enhance gains when we “hit a double.

      Last Thursday and Friday, several of my short calls (and those of many of our members) were closed because I had the 20% guidelines in place. Now, I am in a position to “hit a double” if the market rebounds or roll-down if it doesn’t.

      An elite trading system should address all scenarios including aberrations like we have with the coronavirus concern.


      • Ed February 3, 2020 5:22 pm

        Thanks Alan!

        I’m still reading through your encyclopedia…


  9. Christopher February 3, 2020 11:28 am

    Dr. Ellman,

    I assume that you are no longer practicing dentistry. Neither am I at 85 years of age!!

    I have need to fully become capable in equity investing and am very happy to see your BCI. At 85, I doubt that I ever will return to practice. I loved the work and my patients. Now it’s BCI and Alan Ellman.

    My question is, on Schwab Street Smart Edge (a great platform), have you ever used brackets in your purchases? I have done a lot of reading and with burnt fingers have decided that Covered Call writing is the best way to go. Are brackets advised or not?

    Congratulations on the growth of BCI.


    • Alan Ellman February 3, 2020 1:39 pm


      Congratulations on your retirement. Dentistry was a wonderful first career for me and my family. However, I must admit that teaching options is a lot more fun than upper molar root canals!

      Now, bracketed sell orders (BTC orders placed above and below the STO order) are not necessary for covered call writing. We are protected to the upside because we know our cost-basis by owning the underlying shares prior to selling the option.

      I do advise setting a BTC limit order to the downside using the BCI 20%/10% guidelines. If and when the short call is closed, the next step is dependent on several factors set forth in my books and DVD programs.

      Enjoy your newly found free time… you’ve earned it.


  10. Tony February 3, 2020 10:28 pm


    Would like to ask you the following
    about Selling Covered Call:

    1 – In the option chain there is Bid , MidPoint , Ask,
    which one do you choose?

    2 – What Delta to choose?


    • Alan Ellman February 4, 2020 6:10 am


      1. If the spread is > $0.10, choose a limit order slightly in favor of the market-maker, slightly below the mid-point if selling and slightly above the mid-point if buying. Be sure NOT to check the “All or None” box.

      2. I don’t base my strike selection based on Delta. First, decide on the “moneyness” (ITM, ATM, OTM) of the option and then the initial time-value return goal range (2% – 4% for me). Then check the option-chain and select the strike that meets these requirements.


  11. Ed February 5, 2020 2:43 am


    I’m going to give your system a try.

    One question is about timing. It’s now only 2.5 weeks to expiration. Should I wait until next expiration to start? I haven’t seen anything about starting mid-month that I recall. Typically your material is making the case for monthly options.


    • Alan Ellman February 5, 2020 6:36 am


      Since you are just starting and you are leaning to Monthlys (as I do), I would favor waiting until the February contracts expire and start the week of the 24th.

      The next few weeks can be put to good use by continuing the education process reading our articles, viewing our videos and paper-trading hypothetical accounts.

      Keep in touch and let us know how you’re progressing.


  12. terry February 5, 2020 9:35 am

    Check out TSLA. Definition of a parabolic advance.

  13. Alan Ellman February 5, 2020 5:39 pm

    Premium members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates.

    Also included is the mid-week market tone at the end of the report.

    For your convenience, here is the link to login to the premium site:

    NOT A PREMIUM MEMBER? Check out this link:

    Alan and the BCI team

  14. Ed February 6, 2020 1:55 am


    I have a decent amount of stock and ETF holdings in Vanguard (ROTH) right now.

    Do you recommend following the BCI method purely as designed or can I apply the call selection to existing positions?

    AAPL, AMZN, MA, QQQ, VOO, VO, VTWO, etc.



    • Alan Ellman February 6, 2020 6:04 am


      Yes, covered call writing can be “tweaked” to enhance returns of shares owned in a long-term buy-and-hold portfolio where shares are to be retained. In my books and DVDs, I refer to this strategy as “portfolio overwriting”. We use out-of-the-money calls with strikes based on annualized return goals.

      This strategy is detailed in our book, Covered Call Writing Alternative Strategies”:

      We have also developed a calculator specific for portfolio overwriting:

      Tax issues are eliminated in sheltered accounts like the one you describe.


      • Hoyt T February 6, 2020 3:06 pm

        Hi Alan and Ed,

        My times have changed at Vanguard. When Bogle was running things you were limited to a small number of fund transfer per month as it added to expenses that all fund owners shared. He would never have allowed ETFs much less options.

        Now Vanguard has brokerage accounts. I have accounts at Vanguard but I don’t trade there. I called and talked to them this afternoon and my impression is that it is very limited. I haven’t even thought about trading at Vanguard although I knew they had changed my accounts over to “Brokerage” accounts.

        Since I am not approved for options there, and don’t want to be, I am not sure what their trading screens look like. Their stock and ETF trading screens seem archaic to me. I don’t know what kind of research they have Not wanting to take up their time unnecessarily I didn’t really get into the details. I don’t think I would want to trade there. They have $0 commissions and $1.00 per contract fees on options. Most brokerages are at $0.50- $0.65 per contract with some even less.

        Ed, it would be nice if you would share your experiences with us.

        Hoyt T

        • Alan Ellman February 9, 2020 9:31 am


          Thanks for sharing this valuable information.

          Vanguard can be a great resource for those who want to take advantage of the extremely low expense rations for their broad market index funds. This would not apply to option trading but could be for those looking to establish a long-term investment strategy as discussed in my book, “Stock Investing for Students”


  15. Terence Teo February 9, 2020 4:32 am

    This article is confusing for me. Is it comparing in a bear market and using short put must be for neutral to slightly bullish so why select this for comparison?
    I understand profit/loss for covered call and short put is similar synthetically so what’s the catch for doing comparison for bear market?

    • Alan Ellman February 9, 2020 9:27 am


      In bear markets, we can take advantage of the intrinsic-value component of ITM calls for additional downside protection. Some investors want to have an additional layer of protection before buying the stock or ETF by first selling an OTM put. Now, if share price declines but not below the put strike, we have generated put premium without losing on the stock side. If shares are “put” to us, we can then write an ITM call if we are still bearish on the market. Share price would have to drop dramatically to be in a losing position when using puts before calls in a bear market.

      This article shows a real-life example of the initial time-value returns when using each strategy in bear markets where we are most likely to consider put-selling although put-selling is a great strategy in all market conditions. I prefer covered call writing in normal to bull market environments where I can take advantage of OTM calls as I alluded to in this publication.


      • Terence Teo February 9, 2020 7:01 pm

        Thanks for the quick response. I see your angle now. Both are concocted to procure shares and comparison done to show this impact in a bear market between selling ITM call and selling OTM put.

        Selling ITM call has the right posture as it captures premium but relatively small in above example. I’m not sure if risk capital is worth it though since it is ITM.

        I do agree with selling OTM put if falling stock prices are not substantial otherwise it is a losing proposition than buying stock outright with a buy-low order. its paltry premium has to be weighed against major risk falling market continues hard.