- How it works: You own 100 shares of a stock and sell a call option against them to collect an upfront cash payment called a premium. [1]
- Safety advantage: You already own the asset. If the stock price goes up, you make money on the stock plus the premium (up to your strike price). You also keep any dividend payments. [1, 2]
- Main risk: If the stock crashes heavily, you lose money on the stock value just like any regular shareholder. [1]
Selling a Cash-Secured Put
- How it works: You set aside enough cash in your account to buy 100 shares and sell a put option, collecting a premium for agreeing to buy the stock if it drops below a specific target price. [1]
- Safety advantage: Your cash collateral earns interest (if held in cash-equivalent funds like T-bills) while you wait. [1]
- Main risk: If the stock plunges, you are forced to buy the shares at your agreed strike price, which can leave you holding an asset worth much less than what you paid for it. [1, 2]
- Choose a covered call if you already own a good stock and want extra income while being comfortable selling it. [1]
- Choose a cash-secured put if you do not own the stock yet, but want to get paid to wait for a lower entry price. [1]
