Covered calls and put spreads are not the same strategy. Using the wrong one for your situation is an expensive mistake.
Options strategies get lumped together in ways that obscure important differences. Covered calls and put spreads both involve options, and both get described as ways to manage risk, but they serve fundamentally different purposes. Confusing them leaves portfolios poorly positioned for the actual goal.
A covered call involves selling a call option against a stock you already own. The buyer pays you a premium upfront. In exchange, you give up the right to participate in the stock's upside above the strike price during the option's life.
This makes sense when you own a position with significant unrealized gains that you are not ready to sell, you want to generate income from that position in the interim, and you are willing to cap your upside at the strike price. Covered calls work best on positions where you expect modest appreciation or sideways movement - not on positions where you expect significant near-term upside.
A put spread involves buying a put option at one strike and selling a put at a lower strike. What you get is defined protection against a decline in the underlying - between the two strikes - at a known, limited cost.
Put spreads make sense when you have a concentrated position with a large embedded gain, you want to protect against a meaningful decline while keeping the position intact, and you are willing to pay a premium for that protection.
Using a covered call as a hedge is a category error: it generates income but provides no floor on the downside. Running a put spread as an income strategy is just as wrong, because the premium cost typically exceeds the income generated. The strategies are not interchangeable, and treating them as if they are is how investors end up thinking they are protected when they are not.
At STQ, we use both strategies in their appropriate context, for their appropriate purpose, and always evaluated through a tax lens first.
Interested in how options overlays might work in your portfolio? The Portfolio Diagnostic includes a full analysis of where these strategies add the most value.
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