Covered call writing and selling cash-secured puts are both outstanding low-risk strategies that can outperform the overall market on a consistent basis. I am on record as favoring covered call writing in normal to bull markets and include put-selling in bear markets. In normal to bull markets, covered call writing gives us the flexibility to use out-of-the-money (OTM) calls which provides the opportunity to 2 income streams with the same trade, one from call premium and the other from share appreciation from current market value up to the OTM strike. In bear markets, selling OTM puts generates similar premium returns as calls and, in many scenarios, allows us to purchase the stock at a slightly lower cost-basis than had we sold a covered call should the put get exercised. It’s a close call but I give a slight edge to put-selling in bear markets.
Real-life example with ZTO Express Inc. (NYSE: ZTO)
With ZTO trading at $23.29, we will look at selling the $22.00 ITM call and $22.00 OTM put. We are assuming a bear or volatile market environment where we are willing to accept an initial modest time-value return in return for greater downside protection.
ZTO call-put option-chain for 5-week returns
ZTO call calculations with the Ellman Calculator
ZTO put calculations with the BCI Put Calculator
Analyzing calculation results
The initial time-value returns are similar (1.2% for calls and 1.15% for puts). The intrinsic-value of the call option ($1.29) buys down our cost-basis from $23.29 to $22.00. If the put is exercised, the 6.61% discount results in a cost-basis of $21.75 ($22.00 – $0.25), slightly lower than that of the covered call (a 1.4% advantage).
Discussion
In normal to bull market environments, covered call writing offers the benefit of potential 2 income streams per trade when using OTM call strikes. In bear markets, OTM puts will generate similar initial time-value returns but frequently allow us to own the underlying security at a slightly lower cost-basis if and when the put is exercised.
Your generous testimonials
Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:
Hi Alan,
I really like your style. I can tell that you have a huge understanding of options and you present the material very clearly and in an organized fashion. I’m also convinced that you are truly honest, not always the case with premium membership systems. So, thanks again for that.
Ed
Upcoming events
1. February 6th – 9th 2020 Orlando Money Show
3- Hour Masters Class Saturday February 8th 1:45 – 4:45 PM
BOOTH 306
2. Tuesday March 10, 2020 Long Island Stock Traders Meetup Group
7 PM – 9 PM
Plainview- Old Bethpage Public Library
Covered Call Writing Blue-Chip Stocks to Create a Free Portfolio of Large Tech Companies
New events added this week
1. Options Industry Council (OIC) Webinar: April 8th 4:30 PM ET
2. Las Vegas Money Show: May 11th – 13th
***********************************************************************************************************************
Market tone data is now located on page 1 of our premium member stock reports and page 8 of our mid-week ETF reports.
*********************************************************************************************************************