Which Is Better: Covered Calls Or Cash-Secured Puts?
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Covered Calls and Cash-Secured puts seem to be the most popular choices among traders in finance and stocks. And for a good reason. The two trades in the same market, just on different terms. That’s right. And it all started with the same idea…
Both kinds of trading are pretty much the same, except for the amount of trading allowed each day. But which one is more lucrative? And which one is best for you?
The answer to that question depends on a few variables. For example, if you’re investing your savings (which you aren’t) and are hoping to grow it into a nice nest egg, then you might think about Covered Calls as a way to do that. If you’re betting on a certain stock, then a Cash-Secured Option seems like a good way to go.
Which is better? That depends on several factors. For example, if you’re trading your money (you aren’t) and you’re hoping to make a profit in the process, then day trading would probably be more profitable. It allows you to buy and sell your stock options (and call options) on the same day. It also gives you the freedom to do your thing, takes a day off, and then return and trade the next day again.
For many investors, that’s enough. They know their goal, and they know they’ll be able to get back in on the swing trades (the upside). Or perhaps they’re not sure how they’d go about day trading. So, they’d still instead invest in a Cash-Secured Option. But even though they could technically take their money and put it in the “B” part of the stock (for example, by borrowing it from a friend), they are still putting their funds at risk.
Which is better? The answer depends on what you plan to do with your money. If you’re just looking to double your investment in one day or to make a little bit of money back on your retirement account, then the stock option is probably the better choice for you. They consider both options as viable investments, and, in some respects, they are right. However, many also prefer one option mainly because of the risks involved with both Covered Calls and Cash-Secured Puts.
Covered Calls are known as short-selling options. This means that when you purchase a Call option, you are essentially purchasing or selling a security in the hopes that it will rise in the market. You thus hope that if you are correct on the anticipation of an upward move in the market, you can sell your Call options for a profit. As soon as the movement in the market reverses, you are at a disadvantage, and you are required to pay the premium on your Covered Call. However, if you correctly predict that the price will fall, you have nothing to lose by selling your Covered Calls at an attractive price.
Cash-Secured puts, on the other hand, are long-term investment options. When you opt for a Cash-Secured Put, you are buying a second position on the underlying asset. This means that you assume the risk of a short sale in the market and hope that you are right. As such, you stand to make only the premium on your Covered Calls but no such worries when it comes to long-term trading.
Thus, is there a difference between Covered Calls and Cash-Secured Puts? For most people, the answer is a resounding “yes.” However, that does not necessarily mean that it is easy to identify which is which. This is because a particular market has characteristics that determine what options are best for it. For instance, the market may go, either way, meaning that one option is better than the other. The key here is to identify the right option for the particular situation.
With the help of online trading resources, it becomes effortless to compare different options contracts, including Covered Calls. It also becomes easy to analyze the pros and cons of trading in this manner. Hence, if you are searching for the ideal option for you, it becomes easy to identify whether a Cash-Secured Put or a Covered Call is the right choice.
Of course, you need to adopt the right trading plan to find out which is better. Once you know the pros and cons of trading on the underlying instrument, you can easily choose the option that gives you maximum return on investment and the least risk. However, even after you have adopted the right trading plan, you will still need to check with the experts on how to trade in such a manner so that your investment does not land up in loss. That is why it is essential to talk to professionals and find out their opinion. Only then should you opt for the particular option.
Moreover, it would help if you also asked the advice of the trading strategy consultants who will give you the best trading plan to ensure that you do not lose money on the underlying instruments. You can even use the online options brokers to discuss your trading plan and strategies with the various experienced traders. You can even obtain advice from them on how to identify the right options broker. Alternatively, you can also talk to the financial advisors to discuss the options trading strategy and brokerages.
Once you have zeroed in on the right brokerage firm, you will be well-directed regarding the options trading strategy that would work best for your investment plan. This is the reason why you should ask the advice of professionals as well. Only then should you finally settle for any particular option trading plan. If you are confused about which is better: covered calls or cash-secured puts? Which is better: trading on news releases or premium index futures?
Author Bio-
Adrian Collins works as an Outreach Manager at Option Dash. Option Dash is always looking forward to offering the best covered call and cash secured put screener on the internet. Adrian is passionate about spreading knowledge on stock and options trading for the rising investors.
Category: Covered Call Writing
