OPTIONS Covered Calls and Cashsecured Puts What is

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OPTIONS Covered Calls and Cash-secured Puts

OPTIONS Covered Calls and Cash-secured Puts

What is an option? � � It is the ability, but not the obligation,

What is an option? � � It is the ability, but not the obligation, to buy or sell a security at a given price (strike price) within a predetermined time period. There are two sides to options trade contracts -Buying of contracts -Selling of contracts (writing) 1 contract = 100 shares of underlying security Monthly options expire every 3 rd Friday of the month

Options Strategy � Selling Covered Calls -You receive money today (premium) in exchange for

Options Strategy � Selling Covered Calls -You receive money today (premium) in exchange for your stock’s potential future upside -The money is yours, regardless if the option is exercised on or before the expiration date -The position is “covered” because you own at least 100 shares of the underlying security

Covered Call Example � � DHR $80 on June 25 th August 18 th

Covered Call Example � � DHR $80 on June 25 th August 18 th option chain Strike Price � Premium per 1 contract = 100 shares $85 $2 $90 $1 Earnings release date: August 30 th

Covered Call Outcomes � � � The stock price goes down…. . The stock

Covered Call Outcomes � � � The stock price goes down…. . The stock price goes up, but doesn’t reach strike price…. The stock price exceeds the strike price….

Covered Call Illustration 6/25 $80 8/18 Potential Opportunity $85 Strike Price Forfeited Opportunity $90

Covered Call Illustration 6/25 $80 8/18 Potential Opportunity $85 Strike Price Forfeited Opportunity $90

Cash-secured Put � Selling Cash-secured Puts -You receive money today (premium) in exchange for

Cash-secured Put � Selling Cash-secured Puts -You receive money today (premium) in exchange for downside risk. -The money is yours, regardless if the option is exercised -The position is “cash-secured” because the money must be in reserves within your account

Cash-secured Put Example � � � DHR $80 on June 25 th August 18

Cash-secured Put Example � � � DHR $80 on June 25 th August 18 th option chain Strike Price Premium per 1 contract = 100 shares $75 $2 $70 $1 Earnings release date: August 30 th

Cash-secured Put Outcomes � � � The stock price goes down…. . The stock

Cash-secured Put Outcomes � � � The stock price goes down…. . The stock price goes down, but doesn’t reach strike price…. The stock price exceeds the strike price….

Cash-secured Put Illustration 8/18 $70 6/25 Overpayment $75 Strike Price Potential “savings” $80

Cash-secured Put Illustration 8/18 $70 6/25 Overpayment $75 Strike Price Potential “savings” $80

Conclusion � � � Options can be used to provide income to your existing

Conclusion � � � Options can be used to provide income to your existing portfolio or reduce cost basis while waiting for anticipated price movements. Cash-secured Puts can be used similar to limit orders to secure stocks at a lower price basis. Covered Call Video

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