Covered Calls vs. Cash-Secured Puts 2: The Best Strategy for Intermediates

Options trading can be an exciting hobby, but the stakes are high. As we mature as options traders, we must refine and improve our skill sets.

I wrote “Covered Calls vs. Cash-Secured Puts” roughly a year again, so it’s time to dig a little deeper. How do you pick stocks that give great returns? How do you know their valuations? Let’s begin.

Picking stocks for cash-secured puts. Never sell cash-secured puts on stocks you don’t want to own. In other words, sell cash-secured puts for stocks you would love to own.

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This is the most essential rule of your “cash-secured puts” career. Let’s examine some stocks that will provide you with great income.

I avoid dividend-paying stocks when selling cash-secured puts because I want to achieve a high-income level.

Options money comes from time and volatility. The more volatile the stocks, the more options premium you will earn.

Inherently, dividend-paying stocks are less volatile than young stocks. For example, let’s take AT&T’s (T) dividend yield of around 5-6%. From these numbers, you can deduce its tentative share price.

If AT&T’s (T) dividend yield jumped to 10%, it would bring so many investors to the stock that the share price would rise. Alternatively, the stock price is too high if its dividend yield is 2-3%.

You can do the same exercise with stocks like McDonald’s (MCD), Procter & Gamble (PG), and Altria (MO). These dividend stocks are some of my favorites, but don’t make good stocks for selling cash-secured puts (as an income strategy).

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However, if you are looking to increase your dividend income, it’s not a bad idea to sell cash-secured puts to obtain these stocks at the lowest possible price. 

Finding volatile stocks. I keep my dividend portfolio and options trading account separate. My options trading account is a large pile of money that I can utilize to make current income.

With that in mind, I want to generate the most income with the least risk. So, I avoid meme stocks like GameStop (GME) and find young, volatile stocks like SoFi (SOFI) and Rivian (RIVN).

These stocks are volatile because they can trade for high multiple levels above their earnings. This means that the stock can trade higher because of future speculation.

However, you must ensure you are not selling cash-secured puts at the top of their valuations. Let’s look at Palantir (PLTR).

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At this time last year, Palantir was one of my cash-secured put darlings. Depending on earnings calls, it was trading in the $15-$20 price range.

However, today it trades for $66—pushing it out of my list of tradable stocks. As soon as it crossed $30, I knew I wouldn’t trade it any longer.

I knew this because I set parameters on my price chart. The goal of putting some indicators on your price chart is to see the highs and lows of the stock over the last couple of months.

Between earnings calls and other significant announcements, stocks typically trade in a range. You must understand and follow your stock’s price range to trade cash-secured puts.

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Currently, SoFi’s valuation is a little high at $15.91. Its typical price range is between $7-$10. I am waiting to see if this is a permanent shift upward or a fluke. I am on the sidelines.

The indicators I put on my Yahoo Finance chart are Bollinger bands and MACD (moving average convergence/divergence). The standard settings are good for me.

Why the focus on cash-secured puts? Timing your cash-secured puts is the most challenging part of the options wheel strategy. If you get it wrong, you could be in a world of hurt.

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So to recap, you only want to trade stocks you love. I love Rivian (RIVN) because I see their cars on the road. I love SoFi (SOFI) because I have a high-yield savings and brokerage account with them. I believe in these companies.

Next, you want to follow their price movements every single day. I create a watchlist on all of my major websites, including Yahoo Finance, Seeking Alpha, Wells Fargo, and Charles Schwab. I always know their price.

If I see Rivian price below $10, then that’s the time I sell a cash-secured put at a strike price of $9. That’s right; you sell a put after the stocks have fallen a few points.

If I see SoFi at $16 (it’s usually around $8), then I don’t sell a put—I just wait. Or you could sell a put at a super low strike price, say $13. You can earn $16 per contract at this strike price—a 14.7% annual yield.

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Now on to covered calls. You must exercise maximum caution when selling cash-secured puts, but what about covered calls?

When you see that the stock price is depressed, you can purchase 100 shares instead of selling a cash-secured put.

For example, I could purchase 100 shares of SoFi at $8 apiece. This purchase positions me to sell covered calls successfully.

Once you own the stock, there is no guesswork involved. You know your cost basis, which is all you need to know.

Let’s say I buy 1,000 shares of SoFi for $8 each; my cost basis is $8. If I sell covered calls at the $9 strike price, I will be profitable no matter what happens.

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However, what happens when the stock price drops to $6? Now you are in a world of hurt. You can sell covered calls at $8.50 but won’t receive a high premium.

That’s why cash-secured puts are equally valuable as covered calls—owning stocks can be heartbreaking.

I once had to wait almost three months for Palantir’s stock price to recover. I had 1,200 shares. It is something I do not want to repeat.

After that situation, I put a lot of effort into successfully selling cash-secured puts. I want to avoid owning shares at all costs.

If you can get the shares at an extremely low valuation, you can sell covered calls easily. Imagine having a $8 cost basis when the stock price is $16.

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Conclusion. Even in these cases, you want to protect your shares when selling covered calls. You don’t want to give up your massive advantage against the market.

When selling covered calls, you will receive the highest premium at the closest strike price to the share price.

For example, if the share price is $16, the strike price of $16.50 would pay the highest premium. This also puts you at the highest risk of losing your shares.

When you have a massive cost basis advantage, you still want to prevent yourself from losing those shares. Therefore, you may choose a strike price of $18.

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The moral of the story, with cash-secured puts and covered calls, is to obtain the lowest cost basis—and protect it at all costs.

You must follow the stock price trend to know when to sell cash-secured puts. You must be happy when you obtain shares and protect your low-cost basis.

Selling cash-secured puts and covered calls can be pretty fun when you know what you are doing. 

Believe me; it’s a nightmare when you get in over your head. Always know your cost basis and point of no return (like Palatir going above $30).

Welcome to the wonderful world of selling cash-secured puts and covered calls. It can be magical if you don’t take the easy money. Do the research, track the trends, and make good long-term decisions, and you will be very successful. Good Luck!

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