Covered Calls & Cash-Secured Puts

Q: In a covered call, you sell a call option against:

Stock you already own. Covered = you own the underlying shares to cover the obligation if the call is exercised against you.

Q: The main risk of a covered call is:

Capped upside if the stock rallies above the strike. If the stock surges above your strike, you must sell at the strike — missing all gains above it.

Q: If your short put is assigned, you are obligated to:

Buy shares at the strike price. Assignment on a short put means buying 100 shares per contract at the agreed strike price.

A covered call is selling a call against stock you own — generating income but capping your upside. A cash-secured put is selling a put while holding cash to buy shares if assigned — another income strategy for patient buyers.

Quick quiz and answers

In a covered call, you sell a call option against:

Answer: Stock you already own. Covered = you own the underlying shares to cover the obligation if the call is exercised against you.

The main risk of a covered call is:

Answer: Capped upside if the stock rallies above the strike. If the stock surges above your strike, you must sell at the strike — missing all gains above it.

A cash-secured put strategy is ideal when you:

Answer: Want to buy a stock at a lower price while earning premium. Selling a put earns premium now; if assigned, you buy shares at your strike — effectively at a discount.

If your short put is assigned, you are obligated to:

Answer: Buy shares at the strike price. Assignment on a short put means buying 100 shares per contract at the agreed strike price.

Practice this with $10,000 in virtual cash in Tradecraft, free paper trading with real market data.

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