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Covered calls & cash-secured puts
Income strategies — and the risks nobody mentions.
11 min · Beginner
What you'll learn
- Explain the mechanics and payoff of a covered call and a cash-secured put
- Calculate premium return, breakeven and effective cost basis
- Identify assignment risk, capped upside and full downside exposure
Key takeaways
- A covered call caps your upside at the strike plus premium but leaves nearly all the downside.
- A cash-secured put can turn into owning 100 shares at the strike, with an effective cost of strike minus premium.
- US equity options can be assigned early, especially short calls before an ex-dividend date.
- Size these trades by the stock's downside risk, not by the premium collected.
Glossary
- Covered call — Owning 100 shares and selling one call against them to collect premium.
- Cash-secured put — Selling a put while holding enough cash to buy 100 shares at the strike if assigned.
- Assignment — When an option seller is required to deliver or buy shares because the buyer exercised.
- Effective cost basis — The share price after subtracting premium collected, such as strike minus premium on an assigned put.
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