# Covered Call/Put

##### ðŸ’¡ Covered Calls

A covered call is an options trading strategy where a trader sells a call option on an underlying asset that they already own. The underlying asset can be stocks, crypto, ETFs, or other securities. This strategy is employed to generate income from the premiums received.

### What is a Covered Call?

This strategy involves holding a long position in a stock and selling (or "writing") a call option on the same stock.

It's used when an investor believes the stock price will not rise significantly, allowing them to collect the premium from selling the call option. If the stock price does rise above the strike price, the option will be exercised, and the investor will have to sell their shares at the strike price.

### How Do Covered Calls Work?

**Owning the Underlying Asset:**In a covered call, the trader holds a long position in the underlying asset, which serves as collateral for selling the call option.**Selling the Call Option:**The trader sells a call option with a strike price above the current price of the underlying asset. By selling the call option, the trader receives a premium upfront.

##### Covered Call Payoff Structure

**Maximum Gain:**The maximum gain is achieved when the price of the underlying asset remains below the strike price of the call option until expiration. At this point, the trader retains the premium received from selling the call option.**Maximum Loss:**The maximum loss occurs if the price of the underlying asset rises significantly above the strike price of the call option. In this case, the trader's profit potential is limited to the strike price plus the premium received.**Breakeven Point**: The breakeven point is the level at which the trader neither profits nor incurs a loss. It is calculated by subtracting the premium received from the purchase price of the underlying asset.

### Considerations for Covered Calls

**Income Generation:**Covered calls provide traders with a way to generate income from their existing holdings through the premiums received from selling call options.**Limited Upside Potential:**While covered calls offer income, the potential for significant gains from the underlying asset is limited if its price rises above the strike price of the call option.

**Risk Management:**Traders should carefully select the strike price and expiration date of the call option to manage risk effectively. It's important to be comfortable with potentially selling the underlying asset at the strike price.**Time Decay:**Covered calls benefit from time decay, as the value of the call option decreases over time. Traders should consider the impact of time decay when selecting the duration of the call option.

##### ðŸ’¡ Covered Put

A covered put is an options trading strategy that's similar to a covered call, with the exception that the underlying position is short and the sold option is a put.

### How Do Covered Puts Work?

**Holding a short position:**In a covered put, the trader holds a short position in the underlying asset, which serves as collateral for the sold put option**Selling the Put Option:**The trader sells a put option with a strike price below the current price of the underlying asset. By selling the put option, the trader receives a premium upfront.

##### ðŸ’¡ Cash-secured Put

A cash-secured put is an options trading strategy akin to a covered call, but instead of owning the underlying asset, the trader sets aside enough cash to purchase the asset, and the option sold is a put. This strategy is typically utilized as part of a larger income-generating position or when a trader is looking to acquire the asset at a lower price.

### Covered Put vs Cash-Secured Put

**A cash-secured put** is a slightly different and more commonly used approach to a put-selling strategy.

Instead of holding a short position in the underlying asset, as in a covered put, cash-secured puts involve setting aside the appropriate amount of cash to cover the cost of the put option. Similarly to the covered call strategy, cash-secured puts are used to generate profit from premiums, with the additional benefit of potentially acquiring the underlying asset at a lower price.

**A covered put**is written against an underlying short position, augmenting the overall short strategy. It has limited upside while carrying high risk, thus it's more suitable for experienced investors.**A cash-secured****put**aims to profit from premiums while possibly acquiring the underlying asset at a lower price. It carries the risk of the underlying asset price falling lower than expected.

##### Covered Put Payoff Structure

**Maximum Gain:**A covered put strategy is most profitable when the short put expires worthless. In this scenario, the maximum gain is equal to the premium collected plus any potential profit from the underlying short position. If the short put expires ITM, the underlying short position alone would be more profitable.**Maximum Loss:**The maximum loss is theoretically unlimited. If the price of the underlying asset rises significantly, the loss on the short position in the underlying asset continues to increase. The premium received from selling the put option can offset some of this loss, but the net loss can still be substantial.**Breakeven Point:**The breakeven point is the level at which the trader neither profits nor incurs a loss. It is calculated by subtracting the premium received from the price at which the underlying asset was originally shorted.

### Considerations for Covered Puts

**Income Generation:**Just like other option selling strategies, a covered put strategy can generate income from the premiums received from selling the put option.**Directional Bias**: Unlike covered calls or cash-secured puts, covered puts have a bearish bias, and are best employed when a trader expects the price of the underlying asset to decrease.

**Risk Management:**Traders should carefully select the strike price and expiration date of the put option to manage risk effectively. It's important to remember that the potential loss can be substantial if the price of the underlying asset increases significantly.**Time Decay:**Similar to other option selling strategies, covered puts benefit from time decay. Traders should consider the impact of time decay when selecting the duration of the put option.

###### Test Yourself!

What is the maximum loss for a covered call?

The maximum loss for a covered call is limited to the premium sold.

The maximum loss for underwriting a covered call is the cost of purchasing the underlying asset minus the premium received for selling the call option, which could technically be infinite if the asset price goes to zero.

The maximum loss for a covered call depends on how volatile the underlying asset is.