Someone new to options and tastylive might be intimidated by all the various strategies that can be used. A glance at our learn page will reveal common strategies like a Strangle, a Straddle and a Vertical Spread but also more complicated strategies such as a Broken Wing Butterfly and a Jade Lizards. Are there strategies we can use that are closer in concept to just being long stock yet are actually less risky and also increase our Probability Of Profit (POP)?
We believe both the Covered Call and the Cash-Secured Short Put fit that description. The Covered Call limits the profit potential of a long stock position in exchange for the credit received from selling the out-of-the-money (OTM) Call. When using a Cash-Secured Put we collect a credit while waiting to buy 100 shares of stock at the strike price of the Put that is sold. The Covered Call collects premium by capping the upside profit potential at the call strike sold. This premium provides some downside protection and reduces our cost basis against the long shares of stock. Tom noted that “in both cases we are looking to reduce the price that we ultimately pay to buy something.”
A Cash-Secured Put is a short out-of-the-money (OTM) Put with 100% of the loss potential held in cash. A graphic of the Cash-Secured Put risk profile showed that the risk profile is similar to that of a Covered Call but that the short strike is generally below the stock price. A reference guide for a Cash-Secured Put showed that selling a Put is a way to purchase 100 shares of stock at the strike price of the Put while keeping all the premium if the stock stays above the Put strike price.
A table compared long stock to a Covered Call and a Cash-Secured Put. The table showed that the maximum loss on a $100 stock was less by using premium selling option strategies. Both strategies are bullish and rely on premium collection. That is why at tastylive we believe they should be entered, in general, when a stock’s price is low and Implied Volatility (IV) is high. We also believe that trades should be managed at 50% of max profit and that losers can be rolled to the next expiration which will result in additional premium being collected and a further cost basis reduction.
Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for the key takeaways and a better understanding of two strategies which are less risky than being outright long shares of stock and that also have a greater than 50% POP due to cost basis reduction.
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