Calculating Covered Call Writing & Cash-Secured Put Trades for the Same Stock and Similar Moneyness – March 18, 2024
Should I write a covered call or sell a cash-secured put on an elite-performing stock or ETF? I use both but slightly favor covered call writing. Both have worked quite well for me over the past (nearly) 3 decades. On 11/16/2023, I thought it would be instructive to select a stock from our premium watch list and calculate initial covered call writing and cash-secured put returns. I (randomly) chose Pinterest, Inc. (NYSE: PINS) and used 2 strikes out-of-the-money (OTM) from current market value at the time of the trades.
PINS Option Chain on 11/16/2023 for the 12/15/2023 expiration
- PINS is trading at $31.60 on 11/16/2023
- OTM call strike ($33.00) and put strike ($30.00) will be evaluated. Both are 2 strikes from current market value
- Red circles show more than adequate option liquidity (open interest)
- Bid prices are $0.61 (brown cell) for the $33.00 call and $0.44 (green cell) for the $30.00 put
PINS: Covered call writing initial calculations using the BCI Trade Management Calculator (TMC)
- The 30-day return (if taken through contract expiration) is 1.93%, 23.49% annualized (brown cells)
- The breakeven price point is $30.99 (yellow cell)
- Upside potential if PINS moves up to or beyond the $33.00 strike is 4.43% (green cell), creating a maximum 30-day return of 6.36% (without exit strategy intervention)
PINS: Cash-secured put initial calculations
- The 30-day return (if taken through contract expiration) is 1.49%,18.11% annualized (brown cells)
- The breakeven price point is $29.56 (yellow cell)
- If exercised, PINS will be purchased at the breakeven price point, a discount of 6.46% (green cell) from the price when the trade was executed (without exit strategy intervention)
Discussion
Both strategies offered reasonable 1-month and annualized returns. Returns were slightly higher for covered call writing, which also offered significant upside potential. Cash-secured put initial returns were also significant and offered greater protection to the downside with a lower breakeven price point. Both are solid initial trades, with covered call writing being more aggressive and put-selling more defensive.
Author: Alan Ellman