Article
Cash-Secured Puts vs Covered Calls: Complete Comparison Guide (2025)
Compare cash-secured puts vs covered calls for income. Learn which options strategy fits your goals, risk tolerance, and capital. Free calculator & tracking tool.
Table of Contents
Quick Comparison: At a Glance
| Feature | Cash-Secured Put | Covered Call |
|---|---|---|
| Initial Position | Cash (no stock) | Own 100 shares |
| Capital Required | Strike × 100 | Stock price × 100 |
| Market Outlook | Neutral to Bullish | Neutral to Bearish |
| Premium | Generally Higher | Moderate |
| Dividend Income | No | Yes |
| Best For | Acquiring stock at discount | Income from holdings |
What is a Cash-Secured Put?
A cash-secured put is an options strategy where you sell a put option on a stock you'd like to own, setting aside enough cash to purchase 100 shares if assigned. You collect premium income immediately, and either keep the premium if the option expires worthless, or buy the stock at your chosen strike price.
Real Example: Cash-Secured Put
Stock: Apple (AAPL) trading at $180
Action: Sell 1 put contract at $175 strike, 30 DTE
Premium Collected: $250 ($2.50 per share × 100)
Cash Required: $17,500 (strike × 100)
Return: 1.43% in 30 days (17.6% annualized)
Two Possible Outcomes:
- Stock stays above $175: Option expires worthless, you keep the $250 premium (1.43% return in 30 days)
- Stock falls below $175: You buy 100 shares at $175, effective cost basis is $172.50 ($175 - $2.50 premium)
When to Sell Cash-Secured Puts
- You want to own the stock anyway and are willing to buy at the strike price
- You're bullish or neutral on the stock (expect it to stay flat or go up)
- You have cash sitting idle and want to earn income while waiting for a better entry price
- The stock has high implied volatility (IV), offering attractive premiums
What is a Covered Call?
A covered call involves owning at least 100 shares of a stock and selling a call option against it. You agree to sell your shares at a set strike price by expiration, collecting premium income upfront. This strategy generates income from stocks you already own while potentially capping your upside.
Real Example: Covered Call
Stock: Microsoft (MSFT) - you own 100 shares at $370
Action: Sell 1 call contract at $380 strike, 30 DTE
Premium Collected: $200 ($2.00 per share × 100)
Capital Invested: $37,000 (current stock value)
Return: 0.54% in 30 days (6.5% annualized)
Two Possible Outcomes:
- Stock stays below $380: Option expires worthless, you keep shares + $200 premium
- Stock rises above $380: Shares called away at $380, you profit $1,000 ($10/share gain) + $200 premium = $1,200 total
When to Sell Covered Calls
- You own at least 100 shares and want to generate additional income
- You're neutral or slightly bearish on the stock (don't expect huge gains)
- You're okay with selling your shares at the strike price for a profit
- You want to offset potential downside with premium income
Key Differences Explained
Capital Requirements
Cash-Secured Put
Requires cash equal to strike price × 100. For a $50 strike, you need $5,000 in cash reserved.
Covered Call
Requires owning 100 shares first. For a $50 stock, you need $5,000 invested in shares.
Risk Profile
Cash-Secured Put
Risk of buying shares at strike if stock drops. Maximum loss if stock goes to zero is strike price minus premium.
Covered Call
Risk of missing out on gains above strike. You also face downside risk on the shares you own, only partially offset by premium.
Income Potential
Cash-Secured Put
Generally higher premiums due to put options typically being more expensive. Plus you earn while waiting to acquire stock.
Covered Call
Moderate premiums, but you also collect dividends (if any) while holding shares. Total income = premium + dividends.
Real Income Comparison
Let's compare both strategies side-by-side using $10,000 in capital over one year:
Cash-Secured Puts
Starting Capital: $10,000 cash
Strategy: Sell puts 30-45 DTE
Weekly Return: 0.5% average
Monthly Return: ~2%
Annual Income: $2,400
24% Annual Return
Covered Calls
Starting Capital: $10,000 in stock
Strategy: Sell calls 30-45 DTE
Weekly Return: 0.3% average
Monthly Return: ~1.2%
Premium Income: $1,440
Dividend Income: ~$200
16.4% Annual Return
Note: These are conservative estimates. Actual returns vary based on stock selection, market conditions, IV levels, and strike price choices. Use our Premium Calculator to model your specific scenarios.
Understanding the Risks
Cash-Secured Put Risks
-
Assignment Risk: You're obligated to buy 100 shares at the strike price if assigned, even if the stock has fallen significantly.
-
Capital Tied Up: Your cash is reserved and unavailable for other investments while the put is open.
-
Opportunity Cost: If the stock rises sharply, you miss out on buying at lower prices.
Covered Call Risks
-
Capped Upside: Your gains are limited to the strike price plus premium, missing out on larger rallies.
-
Downside Exposure: The premium only provides limited protection. If the stock crashes, you suffer the full loss minus premium.
-
Assignment Risk: Shares can be called away early, especially before ex-dividend dates.
Which Strategy Should You Choose?
Decision Framework
Choose Cash-Secured Puts if:
- ✓ You want to acquire stock at a discount
- ✓ You have cash sitting idle earning minimal interest
- ✓ You're bullish on the stock long-term
- ✓ You're okay owning shares if assigned
- ✓ You prefer higher premiums and don't mind the assignment risk
Choose Covered Calls if:
- ✓ You already own 100+ shares of stock
- ✓ You want additional income from holdings
- ✓ You're neutral or slightly bearish on the stock
- ✓ You're willing to sell shares at strike for a profit
- ✓ You want to collect both premiums and dividends
Best Choice: Use Both!
Many successful traders use both strategies together in what's called the Wheel Strategy. Start with cash-secured puts, get assigned, then sell covered calls on your shares. This creates a continuous income cycle.
Combining Both: The Wheel Strategy
The most powerful way to use both cash-secured puts and covered calls is through the Wheel Strategy - a systematic approach that generates consistent income by rotating between both strategies.
How The Wheel Works:
- 1 Sell Cash-Secured Puts on stocks you want to own at a discount
- 2 Get Assigned Shares when the put expires in-the-money
- 3 Sell Covered Calls on your shares to generate more premium
- 4 Shares Get Called Away for a profit, then repeat from step 1
Common Mistakes to Avoid
❌ Choosing the Wrong Strike Price
Mistake: Selling puts too close to current price for higher premium, or selling calls too far out-of-the-money for minimal income.
Solution: Target strikes that give you 1-2% return while maintaining comfortable probability of profit (70-80%).
❌ Ignoring Assignment Risk
Mistake: Selling options on stocks you don't actually want to own or sell.
Solution: Only sell puts on stocks you'd be happy to buy at the strike, and only sell calls on stocks you're willing to sell.
❌ Over-Leveraging Your Account
Mistake: Using all available capital on one or two positions, leaving no room for adjustments.
Solution: Limit each position to 10-15% of your portfolio to maintain diversification and flexibility.
❌ Not Tracking Performance Properly
Mistake: Losing track of cost basis, premiums collected, and actual returns across multiple trades.
Solution: Use a dedicated tracking tool like Njord Options to automatically calculate P/L, track premiums, and analyze performance.
❌ Chasing High IV Without Research
Mistake: Selling options on high-volatility meme stocks just for the premium without understanding the risks.
Solution: Stick to quality stocks with solid fundamentals. High IV often indicates high risk for good reason.
Frequently Asked Questions
Can I use both strategies on the same stock simultaneously?
No, you can't have both an open cash-secured put and covered call on the same ticker at the same time in a cash account. However, you can (and should!) transition between them as part of the Wheel Strategy - sell puts until assigned, then sell calls on those shares.
Which strategy generates more income?
Cash-secured puts typically generate higher premiums (1.5-3% per month) compared to covered calls (0.5-1.5% per month). However, covered calls let you collect dividends too. The best income comes from combining both in the Wheel Strategy.
What happens if I get assigned early?
Puts: You buy 100 shares at the strike price. Start selling covered calls on them immediately.
Calls: Your shares get sold at the strike price. Use proceeds to sell cash-secured puts on the next cycle. Early assignment isn't bad - it's just the strategy working!
How much capital do I need to start?
You can start with as little as $2,000-$5,000. Look for stocks in the $20-$50 range where 100 shares costs less than your capital. As you gain experience and capital, you can add more positions and higher-priced stocks.
Are there tax implications I should know about?
Yes. Options premiums are taxed as short-term capital gains (ordinary income tax rates). If you hold assigned shares for over a year before they're called away, that gain qualifies for long-term capital gains rates. Consult a tax professional for your specific situation.
What are the best stocks for these strategies?
Look for stocks with:
- • Moderate implied volatility (25-50% IV Rank)
- • Strong fundamentals and earnings
- • High liquidity (tight bid-ask spreads)
- • Stocks you genuinely want to own
- • Popular examples: AAPL, MSFT, AMD, NVDA, SPY, QQQ
Track your Wheel Strategy with precision.
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