Covered Calls vs Cash-Secured Puts: Key Differences, Use Cases, and Strategies
Key Takeaways
The post Covered Calls vs Cash-Secured Puts: Key Differences, Use Cases, and Strategies by Ryan Peterson appeared first on Benzinga. Visit Benzinga to get more great content like this. If you’re looki...
Article Overview
Quick insights and key information
6 min read
Estimated completion
investment
Article classification
July 10, 2025
02:28 PM
Benzinga
Original publisher
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
Table of ContentsWhat is a Covered Call
What is a Cash-Secured Put
Strategy Comparison TableSee All 10 ItemsWhat is a Covered Call
A covered call involves owning at least 100 s of a stock and selling a call option against it
You agree to sell your s 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 fit
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 to own and set aside enough cash to buy 100 s if assigned
You're essentially getting paid to wait for a better entry price
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 FactorCovered CallCash-Secured PutCapital Requirement100 s of the stockCash equal to 100 s × strike priceMarket OutlookNeutral to slightly bullishNeutral to slightly bullishRisk LevelLower than stock-only, but capped upsideSimilar to owning the stock (if assigned)Maximum fitPremium and stock gain up to strikePremium income onlyMaximum LossStock could drop to $0 (same as long stock)If assigned, stock could fall after purchaseBest ForIncome from existing stock holdingsBuying stocks at a discount + incomeTax ImplicationsShort-term gains taxed as ordinary incomeSame, premium taxed as short-term gainIdeal Account TypeTax-advantaged accounts IRAsSame, IRAs to defer taxes on premium Covered Call: ExampleYou own 100 s of XYZ stock at $45
You sell a $50 call expiring in 30 days for $1. 50 per ($150 total)
If the stock stays under $50, the option expires worthless and you keep the $150
If the stock rises above $50, your s are sold at $50 and you still keep the premium, effectively earning $6. 50/ ($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: ExampleYou want to own 100 s of ABC stock, currently trading at $55
You sell a $50 put for $2 per ($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 s 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 RiskWhile 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 since gains are capped
Cash-secured puts tend to do well in low-volatility 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 FitPremiums 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 style
You may use covered calls if:You own a stock you and want to earn extra incomeYou think the stock will stay flat or rise slightlyYou’re comfortable selling the stock at a set priceYou may use cash-secured puts if:You want to buy a stock but at a lower priceYou have idle cash and want income while you waitYou’re okay being assigned and holding long-termTools and PlatformsThese brokers support both covered calls and cash-secured puts with $0 commissions and great tools:Fidelity – best options tools and no trading feesTastytrade – ideal for options-focused tradersCharles Schwab – user-friendly and IRA-friendlyInteractive Brokers – low-cost and very customizableRobinhood – good for beginners but limited analyticsBefore You TradeIf you’re sitting on s of a stock you don’t plan to sell soon, covered calls are a great way to earn passive income, even in sideways
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 QuestionsQDo I need to own stock to sell a covered call
You must own at least 100 s of the stock to execute a covered call
That’s why it’s called “covered. ” You already own the underlying asset
QCan I lose money with cash-secured puts
If the stock falls below the strike price and keeps dropping after assignment, you could end up owning it at a higher price than market value
However, you’re only assigned if the stock hits your strike
QWhich strategy is better in a sideways market
ABoth can work in sideways, but covered calls tend to be more effective if you already own the stock
Cash-secured puts are better if you’re waiting to buy and want to earn income in the meantime.
Related Articles
More insights from FinancialBooklet