Cash-Secured Put vs. Covered Call, Run on the Same $60 Stock

A cash-secured put pays you to wait to buy a stock, and a covered call pays you while you hold it. On the same $60 stock over 35 days, the put in the example below earns 1.75% on its cash and the covered call earns 1.83% on the shares. Both keep nearly all of the stock's downside.

The same $60 stock, two trades

Say a stock trades at $60 and you are looking at options that expire in 35 days. In a cash-secured put, you sell a put and set aside enough cash to buy 100 shares at the strike if you are assigned. In a covered call, you own 100 shares and sell a call that obliges you to sell them at the strike.

Below are two illustrative trades on that stock, priced the way the Money Scale calculators price them, with no commissions.

Look at the best-case row. The covered call can earn four times as much, because the shares can rise $3 to the strike before they are sold. The put's upside stops at its premium.

Each return uses a different base on purpose. A put's return is measured on the strike, because strike × 100 is the cash at risk: $1.00 ÷ $57 = 1.75%. A covered call's return is measured on the stock price: $1.10 ÷ $60 = 1.83%. Run your own strike and premium through the cash-secured put calculator and the covered call calculator to see both side by side.

Is a cash-secured put the same as a covered call?

Close. Owning 100 shares and selling a call has nearly the same profit-and-loss shape as selling a put at the same strike and expiration with the cash set aside. Above the strike, both keep the premium and nothing more. Below it, both lose almost dollar for dollar with the stock.

The differences sit at the edges:

• Where you start. The put pays you to wait for a lower entry price. The call pays you while you hold shares you already own.

• Dividends. The shareholder collects any dividend paid before expiration. The put seller does not.

• Interest. The put seller's cash can earn interest while it waits. The covered-call writer's money is in the stock.

An investor bulletin on options from the SEC lays out the obligation on each side. A call seller must sell the shares at the strike if the buyer exercises. A put seller must buy them.

Which earns more, a cash-secured put or a covered call?

On premium alone, the two trades above are within a tenth of a percentage point. The extras decide the rest.

Interest on the put's cash. If your broker pays 4% a year on the $5,700, that adds $21.86 over 35 days. The put's total return rises to 2.14%, or 22.3% annualized, which edges past the call.

Dividends on the call's shares. If the stock pays a $0.30 dividend before expiration, the covered-call side earns another 0.5% ($0.30 ÷ $60). That moves the call back in front.

Early assignment. The Options Industry Council warns that an in-the-money call can be assigned days or weeks before expiration, especially when a sizable dividend is near. When that happens, the dividend goes to the call buyer, and so does the stock.

What happens if the stock drops 15%?

A 15% drop takes the stock from $60 to $51 by expiration. Here is what each trade loses next to owning the shares with no option at all.

Here the put loses less because its strike started $3 below today's price. That gap is a choice of strike, and a $60 put would have lost about as much as the covered call. Premiums themselves trimmed only $100 and $110 off a $900 drop.

So neither trade is a hedge. The covered call's break-even of $58.90 sits 1.83% below today's price, and the put's $56.00 sits 6.67% below it. Anything under those prices is a loss, and the loss grows with every dollar the stock falls.

When does each one fit?

Compare the two on annualized return, since dollar premiums mislead when the expirations or the capital differ. A 35-day trade that earns $100 on $5,700 and a 60-day trade that earns $150 on the same cash are different rates: 18.3% and 16.0% a year.

A cash-secured put fits when you do not own the stock yet and would be glad to buy it at the effective price: the strike minus the premium, or $56.00 here. If the stock never falls that far, you keep the $100 and buy nothing.

Covered calls fit when you already own the shares and would be fine selling them at the strike. If the stock jumps to $70, the $63 call still caps you at $410 in total. If losing that upside would bother you, the premium may not be worth it.

Taxes follow the same split, too. IRS Publication 550 says premium from an option that expires is a short-term capital gain. If a put you wrote is assigned, the premium lowers your cost basis in the shares. If a call you wrote is assigned, the premium is added to your sale proceeds.

How they fit together in the wheel

Selling puts until you are assigned, then selling calls until the shares are called away, is the wheel strategy. The put and call above are its two halves. The details of each half are in how to calculate covered call return and when to roll covered calls.

If you are sizing a monthly income goal, how much capital $1,000 a month of option income takes runs the numbers at several yields. The options income hub has all four calculators in one place. Before either trade, the covered call calculator shows your break-even, which was $58.90 on the $63 call above.