One of our favorite option-selling strategies is selling cash-secured puts. This involves selling (usually out-of-the-money) put options and securing the possible future contract assignment with the appropriate amount of cash. What about cash-secured call options also referred to as cash covered call options? This latter strategy is quite different from traditional covered call writing in both trade execution and goal. Although this is not one of our go-to option-selling strategies, some of our members have inquired about it so I decided to publish this article to explain how and why it is considered by some investors.

 

What are cash-secured call options?

  • Call options are purchased, giving the option holder the right, but not the obligation, to buy the shares at the strike price by the expiration date
  • Cash is set aside in an interest-bearing account to purchase the shares should the option-buyer decide to exercise the option

 

Goals of the strategy

  • Setting a maximum price for a stock we are interested in holding for the long-term (lower price of the stock or strike price at expiration)
  • Create an opportunity to reconsider stock purchase during the life of the contract

 

Breakeven and maximum loss and gain

  • The breakeven price is the strike price + option premium cost
  • The maximum loss is the price paid for the call option
  • The maximum gain is unlimited

 

Hypothetical example

  • Stock BCI is trading at $61.00
  • Buy the $60.00 call option for $3.00
  • Bullish long-term on the stock
  • Breakeven (BE) = $$60.00 + $3.00 = $63.00
  • Maximum loss = $3.00

 

Various outcomes at contract expiration

 

call option

Outcomes for Cash-Secured Call Options

 

Stock price is $65.00 at expiration

We have a $2.00 benefit over our BE. Had we purchased at $61.00, our benefit would have been $4.00, $2.00 better.

 

Stock price is $63.00 at expiration

This is our BE price so no benefit is realized. Had we purchased at $61.00, our benefit would have been $2.00, $2.00 better.

 

Stock price is $60.00 at expiration

This is $3.00 below our BE and represents our maximum loss (blue cells highlight maximum loss possibilities). Had we purchased at $61.00, our loss would have been $1.00, $2.00 better.

 

Stock price is $55.00 at expiration

This is $8.00 below our BE but we would allow the option to expire worthless rather than exercise the option. After expiration, the stock can be purchased at $55.00, if still bullish on the security or we can re-assess our evaluation of the stock and move to a new one. This also represents our maximum loss. Had we purchased the stock at $61.00, our loss would have been $6.00, $3.00 worse than using the cash-secured call strategy.

 

Discussion

The cash-secured call strategy is used to purchase a stock at the lower of the call strike or current market value, thereby guaranteeing a maximum price while also giving the investor a chance to re-assess the bullish assumption during the life of the contract.

 

Recent Money Show interview

Click to listen

 

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:

Alan,

I thought I knew about covered call writing but you have opened up a whole new world for me.

Thanks,

Louis

 

Upcoming event

July 22: Chicago Traders Expo

All Stars of Options

1:30 – 2:15

Hyatt Regency McCormick Place

 

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Market tone data is now located on page 1 of our premium member stock reports.

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