Covered Calls vs. Cash-Secured Puts: Which Comes First?

Introduction

The wheel strategy revolves around two trades: cash-secured puts (CSPs) and covered calls (CCs). They are the building blocks of the wheel, and understanding their differences is essential. Traders often ask: which comes first? The answer depends on your starting point, your goals, and your risk tolerance.

Cash-Secured Puts

A cash-secured put is a promise to buy 100 shares of a stock at a strike price you choose, backed by enough cash to cover the purchase.

• Income while waiting: You collect premium while waiting to buy shares.
• Defined entry point: The strike price sets the level at which you’re comfortable owning the stock.
• Best for new positions: CSPs are ideal if you don’t yet own shares but want to enter at a discount.

Example: Microsoft trades at $300. You sell a $290 put for $3. If the stock stays above $290, you keep the $300 premium. If it drops below, you buy 100 shares at $290 - effectively entering at a discount.

Covered Calls

A covered call is a promise to sell 100 shares of stock you already own at a strike price you choose.

• Income while holding: You collect premium while waiting to sell shares.
• Defined exit point: The strike price sets the level at which you’re willing to sell.
• Best for existing positions: CCs are ideal if you already own shares and want to generate income.

Example: You own 100 shares of Microsoft at $290. You sell a $310 call for $2. If the stock stays below $310, you keep the premium. If it rises above, you sell at $310, locking in gains.

Which Comes First?

• Start with CSPs if you don’t own shares. They let you enter positions at a discount.
• Use CCs once you’re assigned. They let you generate income while holding shares.
• Together, they form the wheel: CSP → assignment → CC → shares called away → CSP again.

Pros and Cons

CSPs:

• ✅ Lower entry price.
• ✅ Premium income while waiting.
• ❌ Risk of assignment in a falling market.

CCs:

• ✅ Premium income while holding.
• ✅ Defined exit strategy.
• ❌ Risk of missing upside if stock rallies.

Practical Tips

• Sell CSPs on red days for richer premiums.
• Sell CCs on green days for richer premiums.
• Target deltas between 0.2–0.3 for CSPs, lower for CCs if you don’t want assignment.
• Avoid expirations before earnings or after ex-dividend dates.

Conclusion

CSPs and CCs are two sides of the same coin. Together, they create a disciplined income strategy. The wheel is not about predicting the market but about consistently collecting premium and managing risk. Tools like OptionsWheelTrader make it easier to track both sides of the wheel, monitor expirations, and analyze performance.

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This article is educational and not investment advice. Options involve risk; read our Terms and consult a professional as needed.