Covered call vs cash secured put?

What do you prefer and why?

 

In general, there might be advantages to being long the stock/short the call. The one exception I can think of is a decrease in the dividend. Long stock would benefit you with an increase in the dividend and corporate actions.

 

Those that are new to the options game like me tend to start with covered calls. I came from the stock trading side prior to start trading options three years ago and felt that cash secured puts tied up too much capitals and in this days of low interest, the the tied up capitals are not generating enough returns. If you start with holding stocks and use a conservative strategy, covered call is a good way to get your feet wet.

I noticed (using Black Scholes or binomial computations) that market makers already priced in risk free interest rate, dividends and market sentiments (IV) so most options, either call or put are fairly priced. That said, I found puts tend to get a higher premium even factoring in all the above. So, those in this forum that said selling put is a better way to go are probably correct in general.

What I like about options is in the short term the probability/statistics seem to work reasonably well so one can more or less with some certainty predicts what the outcome's probability will be and one can pick or choose how aggressive or conservative one wants to be. The problem is when a fat tail event kicks in, like KRFT, if you sold calls you get killed or WFM, if you sold puts you also get kill. The smart money folks here know how to hedge those risks and that is why I join to learn from the experts here how best to hedge a profitable trade before it turns on you.

Regards,

 

Covered call is riskier, If my memory correct, according to Baird.

 

Re: Covered call vs cash secured put?

Six of one, half a dozen of the other. Both positions are almost identical in terms of risk:reward and lameness.

 

I use both CC and CSP, and you can use them together in the wheel.

for CSP if I just want some income I go otm and plan to close early.
if I want to get the stock, I will go closer to the money.
I usually go 2-4 wks out.

 

So you are buying a stock into weakness? Should be buying into strength, sell into weakness.

 

if I want to get a stock using csp, it is usually after having collected some income using the otm puts, so I have a discount.

 

In theory that sounds good .... but reality is different.

Covered Calls and Cash Secured Puts are neutral to very-mildly-bullish positions. Very rarely will a stock trend sideways in a way to make those two positions worthwhile. The stock is more likely to move up leaving you in the dust, or move down leaving you holding the bag.

You are much better off buying the stock in the first place.

 

Couldn't have said it better! Although if a stock is hard to borrow, you will be better off sell the put instead of a covered call.