Covered Calls vs Cash-Secured Puts: Strategies, Risks & When To Use Each

If you’re looking to generate income in the stock market, two option strategies often surface: covered calls and cash-secured puts. They’re both considered conservative by options standards and can complement a buy-and-hold portfolio if you know when and how to use them.

Here’s the bottom line upfront:

• Covered calls are ideal for investors who already own stock and are looking to generate passive income, especially when they’re neutral to slightly bullish on the stock.
• Cash-secured puts suit investors looking to buy stock at a discount, while earning premium income in the meantime, which is perfect if you’re neutral to moderately bullish.

Here’s a close look at covered calls vs. cash-secured puts, how they work, and when to use each.

What is a Covered Call?

A covered call involves owning at least 100 shares of a stock and selling a call option against it. You agree to sell your shares at a set “strike price” by a certain date. In return, you collect a premium from the option buyer. If the stock declines, the option will expire worthless, and you keep the premium. If the stock increases, you sell it at a profit.

Why do this? To generate extra income from stocks you already own, especially if you don’t expect big price movement in the short term.

What is a Cash-Secured Put?

A cash-secured put means you sell a put option on a stock you’d like to own and set aside enough cash to buy 100 shares if assigned. You’re essentially getting paid to wait for a better entry price.

Why do this? If you’re willing to buy a stock at a lower price, this strategy lets you collect income while waiting. If the stock drops to the strike price, you’ll be obligated to buy—but it’s a company you wanted to own anyway.

Strategy Comparison Table

Covered Call: Example

You own 100 shares of XYZ stock at $45.

• You sell a $50 call expiring in 30 days for $1.50 per share ($150 total).
• If the stock stays under $50, the option expires worthless and you keep the $150.
• If the stock rises above $50, your shares are sold at $50 and you still keep the premium, effectively earning $6.50/share ($5 stock gain + $1.50 premium).

Best-case return: $650 (14.4% on $4,500 over 30 days).
Worst-case: Stock drops, and you still hold it but you earned the $150 premium as a buffer.

Cash-Secured Put: Example

You want to own 100 shares of ABC stock, currently trading at $55.

• You sell a $50 put for $2 per share ($200 total).
• If ABC stays above $50, you keep the $200 and the option expires worthless.
• If ABC drops below $50, you’re assigned and buy 100 shares at $50—even though it’s worth less now.

Effective buy price: $48 ($50 strike minus $2 premium).
Best-case: You keep $200 without buying the stock.
Worst-case: You buy at $50 and the stock drops further but it’s a company you wanted to own anyway.

Historical Performance and Risk

While individual performance varies by stock and strike price, backtests show:

• Covered calls can outperform the market during flat or slow-growth periods. They underperform in sharp bull markets since gains are capped.
• Cash-secured puts tend to do well in low-volatility markets or sideways action, particularly when you’re targeting undervalued stocks.

Both strategies reduce volatility compared to pure long stock positions, but they also limit upside.

Tax Treatment and Account Fit

Premiums from both strategies are taxed as short-term capital gains. That means they’re taxed at your ordinary income rate if done in a taxable account.

What’s your best move? Use these strategies inside a Roth IRA or Traditional IRA to defer or avoid taxes altogether. No matter your outcome, you won’t owe Uncle Sam a cut of your premiums or assigned gains until (or if) you withdraw.

Who Should Use Each Strategy?

It’s important to understand that while both strategies aim to generate income, they cater to different goals and comfort levels. Here’s how to decide which one better aligns with your investing style.

You may use covered calls if:

• You own a stock you like and want to earn extra income
• You think the stock will stay flat or rise slightly
• You’re comfortable selling the stock at a set price

You may use cash-secured puts if:

• You want to buy a stock but at a lower price
• You have idle cash and want income while you wait
• You’re okay being assigned and holding long-term

These brokers support both covered calls and cash-secured puts with $0 commissions and great tools:

• Fidelity – best options tools and no trading fees
• Tastytrade – ideal for options-focused traders
• Charles Schwab – user-friendly and IRA-friendly
• Interactive Brokers – low-cost and very customizable
• Robinhood – good for beginners but limited analytics

Before You Trade

If you’re sitting on shares of a stock you don’t plan to sell soon, covered calls are a great way to earn passive income, even in sideways markets. If you’re looking to own a stock at a better price, cash-secured puts let you set the terms and get paid to wait.

Both strategies are conservative, income-focused, and perfect for long-term investors who want more control over their portfolios. Choose based on your goals, cash availability, and how actively you want to manage your investments.

Frequently Asked Questions