Covered Calls vs Cash Secured Puts

One question that always comes up when using the wheel strategy is what is best, Covered Calls or Cash secured puts?    They are actually very similar if not the same.   I will also give an example when Volatility skew can give one trade an edge over the other.

Covered Calls and Cash Secured Puts offer the same risk/reward when traded at the same strike most of the time.  We will compare NIO trading at $59.85 per share.  We are looking at the 19 March Expiration with 34 days left, 100% Implied Volatility and an expected move of +/- 15.

We will compare the 45 strike, the 60 strike and the 90 strike.

 

In the graphs below the center gray area is the expected move of +/- 15.   The purple line is the P/L for the current day and the blue line is P/L the day after expiration.

First we will compare the 46 Strike Cash Secured Put vs Covered Call.  The Cash Secured Put is .15 delta and the Covered Call is .85 delta.  We can see the the risk graph is very similar with the Cash Secured Put offering $153 max profit compared to the Covered Call offering $109 max profit.  With this trade we are sitting at the lower end of the expected move.  Hitting max profit can be achieved as long as NIO stays above 46.  Our break even is around 45.  This is a low risk low reward trade can work well even in a bear market because our stock can move lower considerably and we will still achieve max profit.  One thing to consider is our short call being deep in the money is at risk of getting assigned early.

Nio 46 CSPNio 46 CC

 

Next we will compare the 60 strike Cash Secured Put vs the Covered Call.  The Cash Secured Put is .43 delta and the Covered Call is .56 delta.  We can see the the risk graph is very similar with the Cash Secured Put offering $710 max profit compared to the Covered Call offering $694 max profit.  With this trade we are sitting in the middle of the expected move.  This is a medium risk/reward trade that works best if the stock trades flat or starts trending upward. We still have some downside protection. The stock can move down 7 and we will still break even on the trade. Hitting max profit can be achieved as long as NIO stays above 60 but we have some room for error as long as NIO stays above 53 we can break even on the trade.

Nio 60 CSPNio 60 CC

 

Lastly we will compare the 90 strike Cash Secured Put vs the Covered Call.  The Cash Secured Put is .78 delta and the Covered Call is .15 delta.  We can see the the risk graphs are nearly identical with the CSP offering $3115 max profit compared to the Covered Call offering $3120 max profit.  With this trade our max profit is sitting well outside of the expected move.  This is a high risk/reward trade that will work best in an upward trend.  Our stock needs to move up to be profitable. We also have very little downside protection. Hitting max profit can be achieved as long as NIO closes above 90.  We need NIO to stay above 59 to break even on the trade.  One thing to consider is our short put being deep in the money is at risk of early assignment.

Nio 90 CSPNio 90 CC

 

 

 

 

 

 

Next we will compare options skew on SBE Switchback Energy.  Switchback Energy is trading at 38 per share and the implied volatility is 138%. Switchback Energy is skewed heavily with the puts a having premium increase over the calls.  The At the Money puts have 170%-190% Implied Volatility while the At the Money calls have 110%-115% Implied Volatility.

SBE option chain

 

 

 

 

The 35 Cash Secured Put has a max Profit of $850 and Break even point of 26.50. The 35 Covered call has $490 max profit and break even point of 30.

 

SBE 35 CSP

SBE 35 CC