Options Theory: Covered Call vs. Protective Put
January 27, 2022
Want to reduce the risk of a stock position? You have two primary choices: sell calls or buy puts. In other words, you can deploy a covered call or a protective put. Today’s video compares and contrasts the two.
Notes
Long 100 shares of stock
Ways to reduce risk/handle a downturn
1) Proper position sizing
2) Adding short call (covered calls)
3) Buy puts (protective put)
Sell Calls (Covered Call)
Tagline: Mild protection
Pros:
1) Positive Theta
2) Higher probability of capturing a profit on that short call
3) Doesn’t cost any money
Cons:
1) Limit your profit potential.
2) You only got a little bit of protection
Buy Puts (Protective Put)
Right to sell stock at the strike price
Pros:
1) Limited Risk – Defined Risk
2) Unlimited Upside
Cons:
1) Negative Theta
2) Costs money
3) Raises your breakeven on the stock.
4) Reduces my probability of profit.
5) if you wait until the market is down significantly, then options are really expensive!
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