Cash secured Options

 

Cash-Secured Puts:

A cash-secured put involves selling (or "writing") a put option and simultaneously setting aside enough cash to purchase the stock if it drops to the option's strike price and gets assigned to you. Essentially, you're agreeing to buy the stock at a certain price if it falls to that level. In return, you receive a premium for selling the put.

Here's a simple example:

You sell a put option on Stock XYZ with a strike price of $50, and you receive a premium of $3 for each option.

If Stock XYZ never drops to $50 or below before the option's expiration, you keep the $3 premium.

If Stock XYZ falls below $50 and you're assigned, you're obligated to buy 100 shares (for each option contract) at $50, even if the stock is trading at a lower market price. However, you've already received the $3 premium, which offsets some of the potential loss.

Covered Calls:

A covered call strategy involves owning (or buying) a stock and selling call options on that same stock. By doing this, you generate additional income (the premium from the call option) in exchange for potentially capping your upside if the stock appreciates beyond the option's strike price.

Example:

You own 100 shares of Stock ABC trading at $60.

You sell a call option with a strike price of $65, and in return, you get a premium of $2 per option.

If Stock ABC stays below $65 before the option's expiration, you keep the stock and the $2 premium.

If Stock ABC rises above $65 and your option gets exercised, you're obligated to sell your stock at $65, even if it's trading higher in the market. But remember, you've already collected the $2 premium.