By Richard N. Croft
Covered call writing is a low risk option strategy. If the underlying rises above the strike price the calls are assigned, you deliver the shares and exit with the best case scenario.
Covered calls make money in a rising or flat market and because the premium received reduces the cost of the underlying shares, is less risky than an outright long position in the stock.
Maximum return is at the strike price of the call, maximum risk occurs if the underlying declines to zero. Although to be fair, maximum risk is a function of the underlying security not the strategy.
Now look at naked put writing. Characterizing any strategy as “naked” implies risk. One is not “covered” by a long position in the underlying but rather is taking on a commitment to buy shares at a specific price for a pre-determined time period.
But here’s the rub; If the naked put writer secures the obligation with cash (i.e. cash secured put) is the strategy riskier than covered calls? Maximum return occurs at the strike price, maximum risk if the underlying decline to zero. In short – pardon the pun – covered calls and cash secured puts are equivalent positions.
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