Topic
Options
Selling calls against shares, selling puts to buy them, and reading the volatility priced into a contract, with every premium sum worked through.
Most option strategies for stock traders start from shares you already own or would be happy to own. A covered call trades away some upside for income, and the wheel puts a cash-secured put in front of it. Both look simple on the order ticket. Both also carry the full downside of the stock, which the premium does not cover.
The covered call calculator shows the maximum profit, the breakeven and the upside you give up at any strike and premium.
Then there is buying. A call or a put bought outright can lose its whole premium, and the price of that premium depends heavily on implied volatility, so the pages on delta, implied against historical volatility and the crush after earnings explain what you are paying for before you pay it. Size any option trade by the most it can lose, which for a bought contract is the premium and for a sold one can be far more.
Strategies
Comparison
Covered Calls on Dividend Stocks: When the Premium Pays for the CapCovered calls suit a dividend stock you would be content to sell at the strike, in a flat or slowly rising market.
Playbook
The Wheel Strategy: Honest Arithmetic on Puts, Shares, Then CallsThe wheel pays you to buy and sell a stock you like at prices you chose, and it carries the full downside of owning that stock.
Guides
Definitions
- Covered call
Owning 100 shares of a stock and selling one call option against them, collecting the premium in exchange for giving up any gain above the call's strike price.
- Delta
How much an option's price changes for a $1 move in the underlying stock: between 0 and 1 for calls, and between 0 and -1 for puts.
Calculators
- Covered Call Calculator
Premium income, maximum profit, breakeven and the upside given up when you sell a call on shares you own.