Selling Puts vs. Covered Calls; Which is Better?
by John Jagerson, Analyst at Learning Markets Investors beginning to use options will frequently start with covered calls. This options strategy provides the benefits of reduced portfolio volatility, monthly income and increased risk control. Depending on your options broker this may be the only options strategy authorized for a new account. These benefits are significant and over the long term can increase portfolio returns. However, it may surprise many investors that the same benefits can be had without increasing risk by selling naked or short puts. In fact, selling puts against the S&P 500 have been shown to outperform the returns of the S&P 500 alone or a covered call strategy on the S&P 500 over the long term. Investors will often avoid naked options trading because they believe that the strategy exposes them to unlimited risk which is theoretically true with a short call but is not the case with a short put. The maximum risk in a short put is equal to the price of the stock min
