How to Make Money with Covered Calls & Cash Secured Puts
If you’re holding onto shares and wondering how to make extra cash without selling them, options trading might be your secret weapon. In this post, we’ll dive into how you can generate income by selling covered calls and cash-secured puts — using MicroStrategy (MSTR), a famously volatile stock, as our example. Whether you’re new to options or just want to understand how to turn your shares into a money machine, this guide breaks it down in a simple, informal way.
What Are Covered Calls and Cash-Secured Puts?
Before we jump into the nitty-gritty, let’s get on the same page about these two popular options strategies.
Covered Calls: Getting Paid to Sell Your Shares at a Price You Like
A covered call is when you own at least 100 shares of a stock and sell a call option against those shares. Essentially, you’re agreeing to sell your shares at a predetermined strike price by a certain expiration date — but you get paid a premium upfront for making that promise.
Think of it like renting out your shares. If the stock doesn’t hit the strike price by expiration, you keep both your shares and the premium. If it does hit the strike price, you sell your shares at that price, which ideally is higher than what you originally paid.
Cash-Secured Puts: Getting Paid to Buy Shares at a Lower Price
A cash-secured put is when you sell a put option and set aside enough cash to buy the shares if the stock price falls to (or below) the strike price. You get paid a premium for selling this put, and if the stock drops to your strike price, you’re obligated to buy the shares at that price.
This strategy is great if you want to own the stock but prefer to buy it at a discount, getting paid to wait.
Why Use These Strategies? The Power of Volatility
The key to making good money from covered calls and cash-secured puts is volatility. Stocks that are more volatile have higher option premiums because the chance of big price swings is greater.
That’s why MicroStrategy (MSTR) is a perfect example. It’s a Bitcoin treasury company holding over 380,000 BTC, and its stock price swings wildly — sometimes moving hundreds of dollars in days. This volatility makes option premiums juicy, offering you the chance to collect significant cash just by writing options.
Breaking Down a Covered Call Trade on MicroStrategy
Let’s walk through a real example to see how this works.
Step 1: Own 100 Shares of MicroStrategy
Suppose you bought 100 shares of MicroStrategy at $340 each — so your total investment (cost basis) is $34,000.
Step 2: Choosing a Strike Price and Expiration
Say you decide to sell a covered call with a strike price of $500 expiring in 10 days. You’re basically agreeing to sell your shares for $500 each if the stock hits that price by expiration.
Step 3: Collecting the Premium
Because MicroStrategy is so volatile, the premium for this option might be around $11 per share. Since options cover 100 shares, that’s $1,100 you get paid upfront just for selling this call.
Step 4: Possible Outcomes
- Stock price stays below $500: Your shares don’t get called away. You keep your 100 shares and the $1,100 premium, effectively lowering your cost basis from $340 to $329 per share.
- Stock price hits or exceeds $500: Your shares get called away. You sell your 100 shares for $500 each ($50,000 total) plus the $1,100 premium, making a total of $51,100. Your profit is the difference between your cost basis ($34,000) and sale price plus premium ($51,100), which is $17,100 before taxes.
Why This Matters
Even if the stock doesn’t reach the strike price, you still get paid. Over time, repeatedly selling covered calls can steadily reduce your cost basis or increase your income. But beware — if the stock shoots way past your strike price (say $900), you might miss out on additional gains.
How to Use Cash-Secured Puts to Buy Shares at a Discount
Now, what if you want to buy MicroStrategy but think $379 per share is too high right now? That’s where cash-secured puts come in.
Step 1: Set Aside Cash and Choose a Strike Price
You decide you’d like to own MicroStrategy at $315 per share. You sell a put option with a strike price of $315 expiring in 10 days, and you set aside $31,500 cash (100 shares x $315).
Step 2: Collect the Premium
Because of the volatility, you might collect around $14 per share in premium, or $1,400 total.
Step 3: Possible Outcomes
- Stock stays above $315: You keep the $1,400 premium, and you don’t buy any shares.
- Stock falls to $315 or below: You’re obligated to buy 100 shares at $315, but your effective cost is $315 minus the premium collected, or $301 per share.
Real-Life Example: Marco’s Covered Call Trade on MicroStrategy
Marco, the video creator, shared his personal trade. He wrote a covered call on 100 shares of MicroStrategy at an $890 strike price with an expiration date less than 30 days away.
- Premium collected: $3,249
- Strike proceeds if exercised: $89,000 (100 shares x $890)
- Cost basis: $34,000 (approximate)
- Effective cost basis after premium: $30,751
- Potential profit if called away: Around $58,221 in less than a month.
This example shows how powerful covered calls can be, especially on volatile stocks where premiums are high.
Key Benefits of Covered Calls and Cash-Secured Puts
1. Generate Income from Existing Shares
You don’t have to sell your shares to make money. Selling options contracts can pay you premiums that add up over time.
2. Lower Your Cost Basis
Collecting premiums repeatedly lowers your effective purchase price, making it easier to profit eventually.
3. Buy Shares at a Discount
Cash-secured puts let you get paid to wait for a better entry price on stocks you want to own.
4. Flexibility
You decide strike prices and expiration dates that fit your market outlook and risk tolerance.
Risks and Things to Keep in Mind
While these strategies sound great, they’re not risk-free.
1. Limited Upside for Covered Calls
If the stock price surges past your strike price, you miss out on gains above that price because you’re obligated to sell at the strike.
2. Obligation to Buy with Cash-Secured Puts
If the stock price plummets below your put strike price, you might be forced to buy shares at a higher price than the market value.
3. Volatility Can Work Against You
High volatility means high premiums but also bigger price swings, which can lead to unexpected outcomes.
4. Taxes and Commissions
Premiums collected are typically taxable, and commissions or fees might apply depending on your broker.
How to Get Started with Covered Calls and Cash-Secured Puts
Step 1: Own or Have Cash Ready
You need at least 100 shares for covered calls or enough cash to buy 100 shares for cash-secured puts.
Step 2: Choose a Stock With Options Available
Look for stocks with active options markets and decent liquidity. Volatility helps boost premiums.
Step 3: Pick Strike Prices and Expiration Dates Wisely
Strike prices should reflect your target sale price or buy price. Expiration dates can range from days to months depending on how active you want to be.
Step 4: Use a Brokerage Platform That Supports Options
Platforms like Robinhood, ThinkorSwim, or Interactive Brokers make it easy to write options contracts and monitor trades.
Step 5: Monitor Your Positions
Keep an eye on stock price movements and be ready to roll your options (extend or adjust strikes) if needed.
Other Stocks and ETFs to Try These Strategies On
While MicroStrategy is a great example due to its volatility, covered calls and cash-secured puts work on many stocks and ETFs:
- SPY (S&P 500 ETF): Lower volatility but consistent options volume.
- AAPL (Apple): High liquidity and moderate volatility.
- TSLA (Tesla): High volatility, juicy premiums.
- Dividend Stocks: Premiums tend to be lower, but you get income from both dividends and options premiums.
Final Thoughts: Making Options Work for You
Options trading might seem intimidating, but selling covered calls and cash-secured puts can be a smart way to generate income, reduce risk, and even buy stocks at a discount — especially if you’re comfortable holding shares long term.
MicroStrategy’s volatility provides a clear example of how this can work in your favor, but these tools apply to many stocks and ETFs. If you’re bullish on a company but want to get paid while waiting, or if you want to lower your cost basis, these strategies are worth learning.
Just remember: always manage your risk, know what you’re agreeing to, and don’t write options unless you’re prepared for the obligations they bring.
Frequently Asked Questions (FAQ)
Q: Do I need to own 100 shares to sell a covered call?
Yes, one options contract controls 100 shares, so you need at least 100 shares for each covered call contract you sell.
Q: What happens if the stock price never reaches my call strike price?
You keep your shares and the premium collected. You can then sell another covered call to generate more income.
Q: Can I lose money selling cash-secured puts?
Yes, if the stock falls significantly below your strike price, you may have to buy shares at a higher price than their market value, resulting in a paper loss.
Q: Are there fees for selling options?
Most modern brokers offer commission-free options trading, but always check your broker’s fees and terms.
Q: Is this strategy only for volatile stocks?
While volatility helps increase premiums, you can use these strategies on stable stocks too, but premiums will be smaller.
If you’re ready to dive into options and start making your shares work harder for you, start small, educate yourself, and consider using high-volatility stocks like MicroStrategy to maximize your premium income. Happy trading!
