Tag Archives | covered calls

iBooks and Me.

A bunch of eBooks about trading options were recently published. Some are good, some not so much. It is difficult to separate the high-quality books from those serve little purpose.

My classic book for beginners from the year 2000: The Short Book on Options (2002) became available as an iBook for the first time today, and I’m proud to join the Apple community.

This book is not for the experienced trader. It is a detailed description of one strategy (writing covered calls) as well as a thorough description of how options work.

The book is also available at your favorite book seller.

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Covered Calls: Bullish or Bearish?


You said selling a covered call is bullish, I think it is bearish. By selling you are making a “bet” that the strike price is too high. Buying a call would be a bullish bet.


Your perspective is somewhat unusual – I’m not saying it’s incorrect – just that it’s different.

I also see that you don’t recognize that options can be used to hedge, or reduce the risk of owning an investment. To you, options are to be used only for speculation. You are free to use options that way, but you are losing out on some of the characteristics of options that makes them so special.

I consider this discussion to be important to the options rookie who is looking for a solid options education.

Without any market bias, these statements about a covered call position are all true:

  • The position is delta long
  • The position earns money when the stock moves higher
  • The position loses money when the stock moves lower
    • Those are NOT the characteristics of a bearish position.

      Profits are limited for the covered call writer

      • That is not bearish
      • It’s a trade-off. The stockholder collected a cash premium now in exchange for potential profits above the strike price later
      • Consider the trader who buys stock and sets a profit target. That’s a bullish trader
      • That’s exactly what the covered call writer does. He/she sets a sell price and collects a cash premium
      • A bearish trader would NOT own stock

      The wager

      Is the bet really that the strike price is too high?

      That is overly simplistic and tells me that you use options purely to speculate. By wring a covered call, the stockholder sells someone else the right to all profits above the strike price – for the lifetime of the option. In exchange he/she gets paid today.

      That’s not bearish. It is a ‘bird in the hand’ investing style. The trader takes the option premium now instead of possible profits later. It’s not a wager to be won or lost. It’s a trade. If the stock goes much higher, that’s a good result. The stockholder wins. From you speculative thinking, the stockholder loses. I do not understand how you can survive as a trader if you are not happy with a profit – just because you could have earned more money had you chosen a different strategy.

      I’m thrilled to write a covered call and be assigned an exercised notice. That’s a winning trade. More than that, it’s the best possible result – after I decided to write the covered call.

      The bullish bet

      Owning stock is a bullish bet. If the stock moves higher, the trader earns a profit.

      Buying a call option is a bullish bet. Yet, if the stock moves higher, there is no guarantee that the call owner will earn a profit. There may even be a significant loss.

      Owning a call may give the trader a chance to make money on a rally, but far too often the trader buys the wrong option (strike price too high) or pays too much for time premium (rapid time decay that hurts the option’s value when the stock price does not increase quickly enough).

      Leverage works both ways. An inexpensive call option can return a large profit, but it can also expire worthless, even when the stock has rallied.

      Buying at the money or out of the money calls is highly speculative, and it takes the right set of conditions to deliver a profit. If the calls are deep ITM, that’s a smarter play. However, I’m certain that’s not the idea you were suggesting.

      Thanks for sharing your thoughts.

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Exercising call options for the dividend

Some myths die hard.
Some never die.

Here’s a comment from a reader:

I read a few of your online articles about when call owners should exercise to capture the dividend. It sounds like it makes sense, but I can’t reconcile this information with other material I read online such as:

Person A:
“I find, if a covered call has even a penny less than the dividend being paid [in time premium], I can be assured of exercise.”

Person B:
“I recently shared with a friend my frustration over early covered call assignment at ex-div. I have been called out early several times. The most recent time was on CTL. I had a call over a month out that was assigned early. That nice dividend was gone.

My friend put me in touch with a Dow Jones Newswire reporter who is writing a Wall Street Journal article on call volume spikes at ex-div….and the guy on the short side of the call.

He asked me to post his info for anyone who would like to tell of their own experience and frustration.”

Person C:
“You sound like you want have your cake (the time premium) and eat it too (the dividend). I think you should accept it as a virtual certainty that you will be assigned when coming into x-date if the time premium remaining is less than the amount of the dividend. Why would you expect that the holder of the contract you sold (the buyer) not want the dividend for himself? Since that person is usually a market maker (with a very low cost of doing business, including cheap commissions and a low cost of margin capital) you will usually be assigned.

If you get to just before x-date and you think you will be assigned you can always enter a spread order to roll the option to one less likely of assignment.”

Person B:
“I’ve traded CC’s for a long time but new to trading for the dividend income.
The CTL option was over a month out so I really didn’t think much about early assignment. I won’t make that mistake again.”

Person D:
“For stocks with large dividends, a call-holder will often exercise the option in order to capture the dividend. This will be done when the option is in-the-money and the Intrinsic value plus the forthcoming dividend exceeds the time value of the call.”

Perhaps these call owners are being exercised, but not for the reasons they think and only Wolfinger is correct?

Some people refuse to believe – despite the evidence

There are people on this planet who do not believe man has ever gone to the moon. There was a time when ‘everyone’ knew that the earth was flat – before discovering, and finally accepting, the truth.

The people you quote are wrong. And it is so easy to demonstrate that they are not only wrong (as anyone can honestly be), but they are stubborn and do not allow the facts to get in the way of their ideas. And you can prove this for yourself.

Person A is not telling the truth. I refuse to believe that he was assigned on a call option with 49 cents of time premium – when the dividend was 50 cents. In fact it doesn’t matter how big the dividend was. If assigned with that much time premium, it was a gift. It was free money. But person A does not understand how options work and discarded his gift.

He has probably never been assigned on an option with any time premium remaining, but this is impossible for me to prove. However, what I can do is prove that he is either the luckiest trader on the planet or just not telling the truth.

      :You can find real world scenarios, but I’ll make do with a fictional example.

      I used the calculator made available by the CBOE and ivolatility.com.

      Stock price: $53
      Expiration: April 15
      Dividend is $0.50
      Ex-dividend date: April 1, or 14 days prior to expiration
      Volatility = 35
      Value of March 50 call (on March 31, the day that the option must be exercised to collect the dividend): $3.27

      Note that the call has $0.27 of time premium remaining, and the delta is 84. Those numbers tell anyone that this call should NOT be exercised to capture the dividend. The downside risk is simply too great.

      When you exercise a call, you are buying stock and selling a call. That combination of trades is equivalent to selling a put – same strike and expiration date as the call exercised. And you sell it for zero, collecting the dividend as the only payment for that put.


The former call owner now owns stock, will collect the $50 dividend, and has something he/she did not have before the exercise: considerable downside risk. The stock is $52.50 (when the stock opens unchanged, it is lower than the previous close by the amount of the dividend.

The former stockholder, who is rejoicing – not complaining as your sample traders do – finds that his/her position is gone. That trader has collected all the time premium in the call option (removing all downside risk), but did not collect the dividend.

Instead, your former stockholders are bemoaning bad luck. All they have to do is open the EQUIVALENT POSITION (to the one held before being assigned). They do that by selling the equivalent put option. [If you are not aware that being short the put is equivalent to owning a covered call position, read this]

What is the value of that put?

In this scenario, volatility is 35, the stock is $52.5 and there are 14 days remaining before that put option expires.

    The put is worth $0.62. In other words, the person who was denied the $50 dividend can probably collect $60 for the put. The trader is better off by $10. That is truly free money. And the best part of being assigned that early exercise notice is that it’s not necessary to take the risk. The trader can be happy to have lost the dividend but be out of a risky position. It a choice: Take the free $10, wait for a higher price for the put (risking loss of the sale if the stock rallies), or be safely out with a profit.

This is not a bad choice. This is not something about which to complain. The people who are crying over the lost dividend never understood options well enough to consider selling the put. In reality they do not understand well enough to be using real money to trade options. Feel free to tell any of them that I said so.

Tristan: This explanation is basic to understanding options and how they work. If you don’t completely understand, please, think about it carefully before submitting a follow-up question. Understand this concept, and you are on your way to being a trader.

Trader B

Some options should be exercised for he dividend, even when one or two months remain. They are low volatility stocks paying a substantial dividend. To prove to yourself that volatility matters, look at the above example using a volatility of 18 instead of 35. You will discover that it’s (almost) okay to exercise. And most people would, even though it is theoretically not quite safe enough.

Person C

There’s not much to say. He talks big, but is option ignorant. The market maker would always sell the put instead of exercising. Any time the MM can get more than $50 for that put, it’s free money – when the alternative is exercising.

He is correct that if assignment is not what you want, rolling is one way to avoid it. But in given scenario, you should want to be assigned. It’s exactly the same as being given a free put option. You may keep that put (hold no position) or sell it.

Trader D

He would have been ok, if he had stopped sooner. His first sentence is true. The second is gibberish.

Tristan: Wolfinger is not always right. Nor is everyone else always wrong. You merely quoted four people who know not of which they speak/write.

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Put selling: Adding to a Losing Position

Hi Mark,

I am inspired by your 'Rookies Guide to Options', I love this book. You are teaching in this book about selling CSP [cash-secured puts] in anticipation to buy stock at desired price, lowering your effective cost.

I have a question regarding this subject, namely selling cash covered puts and covered calls.

Let's say that you want to buy a stock you want to own and the price is approaching support level, you sell puts, strike price is close to resistance. Few days later the price dropped below and you are assigned. This is fine.  You own half of what you intended to buy. Unfortunately price keeps falling, you still want to buy additional half of the shares but you also want to lower your price and add options selling to accomplish that.

I understand that you can sell calls on your shares and sell twice the number of puts. Question is: how to manage this trade, at what price to sell calls and puts? At the same time?  At the same price?  Could you please explain this to a rookie?




Hello Robert,

Thank you. Writing cash-secured puts is a worthwhile strategy.  However, there is considerable risk when the market declines.  That's why it's important to adopt this strategy only when willing to accept ownership of the shares.

1) You won't be assigned so quickly. Do not expect to be assigned an exercise notice prior to expiration, unless the put option moves very far ITM. 

Many rookies mistakenly believe that they will be assigned as soon as the option moves through the strike price.  That does not happen.

2) Your plan is to buy more shares and want to buy them at a reduced price by selling more put options.  You also want to write covered calls on the shares just purchased.

You can do just that.  The first thing you must understand about this process is that this is not an exact science. There are choices to be made.  Let's see if I can help.

First, you must understand that you are adding to a losing position if you buy more shares.  For some traders that is something to avoid at all cost. For others, buying more shares – especially when they didn't buy all the shares they want to own – at a lower price has to be a  good deal.  By not buying the full quantity the first time, they are already ahead of the game.
You are obviously in the second group.  I have no quarrel.  Buying more shares is ok – as long as you still want to own them.  Remember this stock has broken support and is falling.  For many traders, once support is broken, they unload the shares and take the loss.
However, let's continue by assuming you have made the decision to try to buy more shares.
3) You have two separate trades to make and neither has anything to do with the other.  You already own stock, and writing covered calls is a priority.  In fact, you should have sold them as soon as you were assigned an exercise notice and owned the shares.  There was no reason to wait.
All you had to do was choose the strike price and the expiration month.  Making that choice requires some serious decision making.  Because I know that you have my book, I suggest taking another look at the chapters on writing covered calls.  They go into all the thought processes that I believe are necessary when making a good decision.  Once you decide on the call to write, go ahead and sell the calls.  It's unfortunate that you waited, and now the stock is lower.  However, that's history.  Decide at what price you are willing to sell the shares and choose an appropriate call.
As an alternative, ignore profit and loss.  Look at the current stock price and pick an option as if you just bought the sahres at the current price.  Pick a good option to write. Don't sell any cheap options – e.g., don't sell options for $0.25.  If you'd be happy to sell stock at the strike and if you are willing to accept the premium, then that's a good call to sell.
4) Buying more stock is another matter.  Decide how much you are willing to pay and sell the appropriate OTM put options.  Example, if the stock is 48 and you want to buy more shares at $44, then choose a put with a $45 strike price and collect at least $1 in premium.  You will either earn that $100 per put option or own the shares at a net cost of $44.
If the puts expire worthless, keep selling new puts – picking the strike price as you did above.  Decide how much you want to pay and find an appropriate put to sell.
5) There is no reason to consider making these trades at the same time.  It's okay if you do that, but why would you want to do that.  When you are ready to sell the calls, enter the order.  When you decide how much to 'bid' for more shares, then enter the order to sell the appropriate puts. These are separate trades requiring separate decisions. 
There is no reason to conside selling the options at the same strike price, same premium, or anything else that you may have meant by 'the same price.' 
Asking at what price to sell the options is asking the impossible.  I'd have to know the stock price, the historical and implied volatility for the stock, how far out (in time) are you willing to sell the options.  I'd also have to know more about your trade plan – i.e., what you hope to accomplish over time.  Recovering losses is not a trade plan.
Keep one piece of advice in mind:  Your goal is to make money in the future.  Is theis the stock that will accomplish that for you?  If you belive the answer is 'yes' then go ahead with your plan.  If the answer is 'no' becasue this stock has fallen so far that you believe this is not the BEST stock to own, then abandon it and invest your money where you think you have a better chance to prosper today, tomorrow and down the line.
Good questions on the practical side of trading options.
My 33 years as an options Trader

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Limited Portfolio Protection; an Introduction

When discussing methods for protecting a portfolio from large losses, I've mentioned that I prefer a trade that allows me to own extra options – with the condition that those extra options are NOT father out of the money than my 'at risk' options.  Those extra options offer the possibility of earning a good-sized profit if and when a truly unexpected major market move occurs.

The problem with buying extras is that the cost is high.  When buying insurance, or adjusting a portfolio, one of the most difficult decisions is: How much should I pay? It's not the same situation as insuring a house against a destructive fire.  If you cannot afford to replace that house from petty cash (as most people cannot), then insurance is needed, and the cost is not the primary concern. [We all know that we pay too much for insurance, or else the insurance companies would not be profitable]

When we trade with negative gamma (credit spreads, covered calls, iron condors, etc), at some point we may be called upon to make a risk management decision, and that decision will often cost cash.  [Yes, we can always find a way to shift or roll a position for zero out of pocket cost, but that often increases risk, is not a good strategy for general use and is outside the scope of today's post].  There must be a spending limit when making a position safer to own.  At some point, the investment becomes too large, profit potential too small, and it's best to exit the trade – accepting the loss.

Spending less

Instead of buying extra options, an alternative is to buy spreads.  These are far less costly than individual options, and they offer limited protection.  I find that this is a winning trade-off under many market scenarios.  Consider this method and decide whether it has merit for your trading. 

When you buy a 10-point spread and pay $2, there is $8 worth of upside potential – if the market continues to move against your original position. That's a substantial amount of insurance at a very reasonable cost.

The problem is that these spreads are not available for $2.  By the time the market has moved far enough to convince you that risk must be reduced, these spreads may cost $5 or more.  In my opinion, paying half the maximum value of the spread is just too much to pay.

Here's an example:

You sold some call credit spreads: INDX Jan 920/930 when INDX was 840. 

figure 1

Now that INDX has moved to 890, the position is uncomfortable to hold (if it's not uncomfortable for you, at least assume it is for the basis of this discussion) and the experienced trader wants protection.

When buying debit spreads, the objective is to own spreads that are less far OTM than your current shorts because you must earn some good money from that 'protection' to partially offset the original position, which continues to lose money.  I don't know how long you would hold out before buying protection, but let's assume that no one would want to stay in this trade when the short strike (920) is breached.

Figure 2, shows an adjustment: we bought 2 INDX Jan 900/910 call spreads @ $4 each.


figure 2

The $800 paid for the trade comes right off the bottom line, if the market reverses direction. [Of course the trader always has the choice of selling out that protection when he/she feels it is no longer needed]

The $400 debit allows a gain of $600 for each spread, so the upside disaster is reduced by $1,200.

The good and bad news about buying call debit spreads for upside protection is that the expiration profit zone is much improved (red line vs blue line).  It's good news because there is a nice area of significant profits.  The bad news is that the trader may elect to hold this trade into settlement (Market opening for each stock in the index, on the 3rd Friday of the month), and that's a very risky situation.  With the market in the best possible spot (between 910 and 920) at the close of business on Thursday, the trader is set up to take a big hit if the market opens somewhat higher on settlement Friday.  A 10-point move is not that big for an index priced above 900 (it's a 1% move).

The protection looks good, but holding to expiration provides the same high theta (good) and large negative gamma (bad) threat – as always.



It's less expensive to buy the call spread with the highest strikes that are not already in your position (900/910 in this example).  The advantage to that play is that you can buy more spreads for the same money as buying fewer, more costly spreads.  I vote for the 900/910. 

One variation is to buy more (or fewer) such spreads.

However, it's reasonable to buy an 890/900 or an 890/910 call spread instead. 

Another choice is to pay even less and buy the 910/920 spread.  In genral, traders shy away from this trade because it involves selling more of the option they are already short. There is no reason not to make this trade, unless it's difficult for you to examine your position and figure out exactly what you own.  I recognize that this trade adds complexity to the position for less experienced traders.  Note:  I have no objection to this adjustment, but if you find it too strange to manage, then stay away.  You can decide whether this specific adjustment type appeals to you once you gain more experience.

The last variation to consider is buying the 920/930 spread.  Because that's the position sold earlier, this 'adjustment' is merely reducing position size.  This truly is an overlooked trade.  Those who refuse to take a loss, and feel they must adjust to allow an opportunity to escape a risky trade with a profit would never consider this trade.  In my opinion, a trader should buy the call spread that seems to best serve his/her purposes.  If that happens to be the trade sold earlier, then so be it.  Don't let that stand in your way.



The idea of picking up some positve delta (or negative delta, when trading puts) in the form of debit spreads works as a good compromise when making adjustments for negative gamma positions.  My philosophy remains the same on one important issue:  Do not buy farther OTM options.  When short the 920 call, as in our example, the adjustment (single option or spread) should involve purchasing a call with a strike of 920 or lower.

NOTE:  A trader may choose to buy some very far OTM extras as ultimate protection.  These are NOT satisfactory to protect a position such as a troubled iron condor, credit spread, or covered call.  Recognize that this is a waste of money most of the time.  But when the payoff comes, it's a dandy.  Owning these options is not for everyone, but Nassim Taleb claims that it worked wonders for him.



Ideal Christmas gift for your friend who wants to learn about options

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Conversation with a misgudied options rookie

Today's post, is a follow-up to my earlier discussion with Larry.  My original thought was to reply to his comment/questions and let it go.

However, I consider this to be a good topic for a post because it shows how some people can grab onto bad information right from the beginning of their options education, and once off course, must be persuaded to stop what they are doing and try to re-learn what they already believe they know about options.

That's not so easy.  And it's even more difficult if they have been taking lessons and paying someone for all the bad information (I doubt that is what happened to Larry).

I truly sympathize and hope I can get him back to the beginning so that he can get it right this time.



Thanks for taking the time to answer my questions. Regarding puts, I need a little more clarification. Here is what I understand so far: Underlying stock price is $20. For a premium of $2, I buy an at-the-money put with the strike price of $20. The stock goes down to $15. I close the put and realize a net gain of $3 ($5 minus $2 premium). Right?

So here is what I don’t understand: I expect the seller of the put is hoping that the stock stays the same or goes up so that I do not exercise the put and sell or buy the stock. But if is goes down so that I want to exercise my rights under the put contract, it is not clear what happens.

When I exercise the put, the seller of the put parts with his stock, which he committed to selling at $20, but now is worth $15. Where does the $5 come from to fund my realization of gain? Out of pocket from the seller? He has the $2 of the premium, but it seems he has to make up the other $3 with cash.

RE: Selling covered calls: If the worst happens to the seller, namely that the price goes up and the call buyer exercises his option, it is not so bad: the seller did get a what once was fair price for the stock plus the premium. He might have missed out on some upside gain, but it was never really his, so the loss of said upside gain is not so painful.

RE: Selling covered puts, I assume they are covered, when the buyer of the put exercises the option, A.) the seller gives up the stock at a lower price and B.) has to also part with the difference between the strike price and the current price, in this case $5 ($3 cash and the $2 premium). It seems a lot more painful to experience an actual out of pocket cash loss than missing out on a potential gain. Am I close to understanding this?



You seem to have some ideas in place, but this disucssion of put options is discouraging.

You do not seem to understand what a put is, or which rights granted to put owners.  Let's handle your question in sequence.

1) Yes.  Stock is $15, your put is worth $5 (or more) and you realize a minimum profit of $300 ($3 per share).

2) You NEVER know what the seller of the put hopes for.  He may have a large position in which he makes a ton of money if the stock drops.  Just because you bought one put from that trader, don't think you know anything about why he sold that put.


He is committed to buying stock at the strike price of $20.  He/she does not sell stock.

In this scenario, he buys stock, paying $20 when it is worth $15.  He appears to have a loss.  But, depending on how he was hedged, he may have a profit on his whole position – even if he has a loss on this specific option.  None of this is any concern of yours.  And even if you deem it to be a concern, the information of his private transactions is not available to you.

3) Your gain is not $5, it is only $3.

4) Where does the cash come from? The person on the other side of the trade – in this case, the put seller, has a $3 loss.  Yes, he [in reality, it can be anyone who has a short position in that put.  Your connection to the person with whom you made the trade is severed as soon as the trade is made] has to come up with that $3.  Is this surprising to you?

For simplicity sake, just assume that the gain or loss was absorbed by the person with whom you made the trade.

5) Covered calls:  The worst that can happen is for the stock price to tumble and you lose a lot of money.

Your scenario of 'the worst that can happen' is actually the BEST that can happen.  It gives you the maximum possible profit for the chosen strategy. What I cannot understand is why you believe this is the worst case.

Would you rather make a profit that is less than the meximum you might have earned, or lose $1,000?  I think the choice is clear. This is important. This is a crucial concept.  You must understand this concpet.

If you believe that the best possible result is 'the worst that can happen' you must – I mean must – go back to square one and begin learning about options all over again.  This time use a different source to learn.  I suggest The Rookie's Guide to Options.

6) A covered put position consists of 100 shares of SHORT stock plus one SHORT put option. That is NOT the situation you are desscribing.  Long stock and short one put is not a covered put. 

a) The seller of the put does not 'give up' the stock at the lower price.  He/she must BUY more stock at the higher strike price.  This is the definition of a put option.  Do not shrug off this point.  It is essestial.

b) The put seller, and person forced to buy stock at $20 per share, does not have to part with any money at any specific point in time.  Yes, if that seller chooses to exit the trade at the point when he/she is assigned an exercise notice, then $3 per share is lost on the trade.  However, there is no requirement that the trade be closed at this time.

7) If this is truly a COVERED PUT, then the assignment, forcing the purchase of shares, offsets the original SHORT stock position for the covered put writer.


NO. YOU ARE NOT EVEN CLOSE. TO UNDERSTANDING.  Please do yourself a big favor and start all over again.  Do not skimp on time.  Read the most basic concepts about options.

Larry you can do this.  You just have some bad misconceptions and they can be unlearned – if you work with an open mind.


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Covered Calls and Naked Puts Revisited

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Adjusting Iron Condor Positions

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When a rookie trader first becomes aware that some positions produce identical profits and losses, regardless of the price of the underlying asset, it's truly an 'aha' moment. 

It's as if a veil has been lifted and the world has become a brighter place.

  Because I believe this is an important concept and truly enhances a rookie's ability to understand options far more quickly, I devoted a chapter to the concept of equivalent positions in The Rookie's Guide to Options.  I also  provided a solid introduction to the topic in some earlier posts.

Because the primary purpose of this blog is to provide an education to option rookies, let's take a closer look at two different strategies: covered call writing and naked put selling.

But first a word of caution:  These two strategies are most beneficial to investors whose only investment experience consists of owning a portfolio of stocks, mutual funds, or exchange traded funds (ETFs).  Each of these strategies is a less risky method for investing in the stock market – when compared with owning stocks.  The investor earns a profit more frequently, loses less often and does well when the market rallies, trades in a narrow range, or even when it undergoes a small decline.  In each of those scenarios the covered call writer and naked put seller outperform their counterparts who simply own stock.

However, these are considered to be 'not-so-safe' strategies.  If the market tumbles, losses can be sizable.  In that respect, losses are similar to (but smaller than) losses incurred by thsoe who own stock.  And upside profits are limited, whereas the investor who owns stock has the potential for unlimited gains.

Nevertheless, these are both very popular strategies because they are safer than owning stock and offer an investing style that is easy to learn.  I use these strategies to introduce rookies to the world of options.  Once these methods are well understood, then I move on to less risky plays.


If the simple algebra used in the proof that these methods are equivalent was not enough proof, let's take a look at the profit/loss graph for a pair of equivalent positions.  Although this is not strictly 'proof' I hope that seeing identical graphs goes a long way towards convincing you that these positions truly are equivalent.

Previous posts offered more details about covered call writing and naked put writing ('write' has the same meaning as 'sell' – when the investor is not selling an option that was bought earlier).

To be equivalent, the option part (the call or put option that is written, or sold) of each trade must have these elements in common:

  • The same underlying asset
  • The same strike price
  • The same expiration date

Risk Graphs

APPL Jan 300 covered call


AAPL Jan 300 naked put

These graphs are essentially identical.  Any minor difference occurs because the price of the trade execution always plays a role.  Our discussion is based on the assumption that neither trade is made at an advantageous price over the other.  

Interest rates are very low, but it does cost more to carry the covered call position (cash required to buy the position) than the naked put (cash collected when selling the put) and thus the CC should appear to be slightly more profitable by the cost of owning the position through expiration.

One myth that can be destroyed here is that a naked put is riskier than a covered call.  The positions are equivalent.


Other positions

These are not the only two option positions that are equivalent.  Keep in mind that calls are puts and puts are calls (all a trader has to do to convert one to the other is add stock – long or short – to any position).


Free e-books by Mark Wolfinger:  There is a shopping cart, but the cost is zero.

Sampler Version of the Rookie's Guide to Options

Introduction to Stock Options: The Basics

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Trade Plans


Thanks for another thought provoking column.

Would you be willing to
share the template of your trading plan? What factors you deem
important, trigger points, why or if you modify the plan, etc. Nearly
everything I read talks about preparing a trading plan, but nobody gives
an example or explains how to build one.

I always start out by sizing my trade, establishing my maximum
downside limit and expected profitability, then I look at the Greeks,
but I'm sure that I'm blind to factors or processes that will help me
execute better trades. I mostly trade covered calls, with some spreads
and iron condors added from time to time.




Hello Gordon,

I appreciate the kind words, but it's readers such as yourself who provide the fodder with excellent questions.  Thus, I thank you.

One reason you don't see a lot of plans is because too few traders use them and they are very personal.   Besides, what suits one trader is not likely to suit others.

My trade plans are different from those of most traders.  While I initiate positions as iron condors, I always manage them as two separate trades.  I look at the call and put spreads as separate positions – from the point of view of exiting at a profit, and adjusting  for risk.  I almost never have an opportunity to exit both sides of an iron condor simultaneously.

One of the valuable inputs for a plan is:

If something unforeseen happens, which trade am I likely to make? If I list one or two, I can make a trade in a hurry.

For covered calls, the choices are few.  You can exit or you can roll the call.  Or you can sell extra calls (this is a risky choice and I would never choose it).

For iron condors, there are many alternatives, and having a specific plan in place is helpful. 

I don't mean a plan that includes this statement:

'I will cover this call spread and sell this call spread for these prices.'

But I do mean one that reads like this:

'I'll exit 50% or 100% or ?% of this trade when the underlying reaches this price area by this date.  After I do that, I see three good choices: a) do nothing; b) sell a new call spread (list possibilities) if the trade meets my requirements for new trades; c) use this opportunity to buy, or at least bid for, some cheap put spreads – so that I don't get hurt if the market reverses.'

Some traders may prefer to exit the iron condor and open a new one.  This choice is not for me (don't want to move to a more dangerous put position), but it is a viable alternative.

I don't use a template. 

When I own insurance (I don't own any at the moment), I feel less urgency to exit a touchy situation. However, I must make an important statement:  Just because you own insurance and just because potential losses disappear when the market moves far enough, that does not mean that the spread being protected can be ignored.

Repeat: Owning insurance is no reason to ignore risk.  It may appear that your position is well insured and 'safe,' but most of the time if you examine the risk graphs by shifting the date to expiration week, you will notice that the protective nature of the insurance has disappeared [The reasons why this is true is a whole separate discussion]. 

Thus, please treat risky positions as risky positions.  Do not depend on insurance to save you from a large loss.

1) Like you, I have a target profit – with an estimated target date to exit.  When that profit is available, I re-examine the position to see if I still want to exit, or perhaps go for another incremental profit.  I am referring to an extra profit that can be earned in a day or two.  I am not referring to changing a 20 cent bid to only 15 cents.

2) I also have an underlying price at which I expect to make an adjustment.  Obviously, the date that the price is hit makes a big difference in my adjustment choices.  For example, I cannot expect to move the position to another in the same expiration month when time to expiry is short.  That is one good reason for updating the trade plan as time passes.

When expiration is nigh, and I am still holding a trade, if an adjustment is needed, I simply exit.  That's personal because I avoid front-month positions.  I don't just roll to a new position.  I exit.  that's the end of the trade and of the trade plan.

3) I may, and often do, open a new position – but that trade has its own, brand new, trade plan.  In other words, rolling to a new position and combining the trade plans and profit/lost numbers together – is not something I believe is a good idea.  Each trade stands on its own.

4) Although I have a portfolio consisting of several different iron condors (maybe three for each of three different expiration dates), I manage each 'risky' situation on its own.  Sure, I can look at the risk of the overall portfolio and choose not to adjust a specific trade, but I have discovered that this is a losing proposition (for me).  I manage each trade on it's own.

5) If I exit a trade that was insured, I make an immediate decision:  hold that insurance for other trades, or exit the insurance, recovering part of the cost (or sometimes, exiting at a profit).

6) My written plan cannot contain all of this.  However, I can make trades based on experience, even without every detail being written.  The trade plan serves two primary purposes.  It allows the less experienced trader to plan ahead and not face a panic of an 'I don't know what to do' scenario.  When the situation arises, the plan may no longer represent the number one choice that you would make given more time to work on the trade, but it gives you a GOOD trade under stressful situations – and that has real value.

The other reason for a plan is to provide a record of trades and thoughts.  As you review them later, you may be able to see a error in your planning.  Good.  That's a mistake you can avoid making in the future.  Or perhaps some situation will occur a few times and you can see if you handled it well or poorly.  That's educational and information to be used later.

As a new options trader, use the plan to help speed up the learning process, not as a 'written in stone' trade that must be executed if such and such occurs.

7) Right now, I use size as my primary risk management tool. Then I have 'points OTM' guide that is flexible.  When a short spread reaches that point, I make an adjustment.

8) My adjustment strategy varies with market conditions, and whether I own insurance.  When IV is high, I prefer to roll to a position with the same expiry – assuming there's enough time remaining – at a higher strike.  I prefer to increase size – usually in a buy two and sell 3 ratio.  But I only increase size when overall risk allows for it.  More size is often a very poor adjustment choice. 

9) I tend to cover 10 to 20% of the short spreads at one time when making my first adjustment.  I do NOT 'roll' into a new trade.  I'm always looking for new trades, and add them when appropriate – not just because I exited a risky position at a loss.

10) If a position is too risky – because the market moved a bit too far or because I got stubborn, then I exit the whole position.  I truly don't feel that I must make a new trade to recover the loss or that I must roll to give myself a chance to recover the loss.  The next trade I make – whenever that turns out to be – will, by definition, be an attempt to recover all, or part of that loss..

11) A plan written with 90 days to expiration is no longer valid when only 30 days remain, so rewriting plans weekly or bi-weekly makes sense to me.

12) I don't believe that your plans prohibit you from finding better trades.  There is only so much you can do with a covered call.  Once you pick the stock, the biggest part of the task is finished.  Choosing the option is probably not a methodology you can set in stone.  Whether IV is high or low may influence the expiration date.  Your gut feel for the market, even if you claim not to have a bias, may influence the strike price.  Thus, sticking to one unshakable CC strategy probably does not work for most people.  I recommend consistency, but common sense and comfort zone boundaries must count for something when planning a new trade or adjusting an existing position.

13) Gordon, from your description it seems to me that you are covering the important points with your plan.  For me, the plan's purpose is to provide an idea in case of an emergency market move. It's designed to prevent a panic decision.  It's not so much used to make the daily decision on whether to hold today or exit.  Once your trade is near that 'take the profit or hold' point, you must manage the position to satisfy the risk/greed ratio.

14) However, here's something you can add to your plan:  "Why am I making this trade?  What will convince me that I made a mistake and that the underlying is not going to behave as expected?  Dare I still hold onto a covered call (or iron condor) and the downside risk?  Is this price decline likely to be temporary, or must I abandon this trade now?"  The answers may be the result of technical analysis, a re-evaluation of your stock selection process etc. But this re-evaluation becomes part of the plan.

15) I don't look at the plan as a big money-maker.  I look at it as good method for being certain that a trader understands the specific trade and what he/she hopes to accomplish (some traders slap on a position with no idea of what they expect to happen). 

Plans help.  They are not essential, but they offer guidance and help solve the anti-greed problem.  You may even discover (too late for this trade) a good reason why a choosing a different strike price for the initial trade would have been better for your specific situation.  I am not saying:  Strike should have been lower because the stock declined.  No.  I'm referring to a real, logical reason: Something you could have seen, but missed.

Use plans to provide guidance.  Don't allow writing the plan to drive you nuts.


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