Options FAQs

This list represents some of the most frequently asked questions relating to the Chicago Board Options Exchange and options trading in general.

Strategy Questions

What is the best strategy if you are seeking options on high volume stocks that are about to break out?

There is no "Best Strategy" when it comes to options. Many would say the outright purchase of a call option or a put option would be a trade that could turn out well, since it involves limited risk and substantial potential, however there is no guarantee that the stock will reach your strike price. Also, since options have a limited lifetime, the option could expire before the break out starts or finishes.

If I own stock, can I sell the options on them?

Owning the underlying stock and selling an option (you are probably referring to selling a call option against the stock, otherwise known as a covered write) is a very common strategy. Selling an option obligates you, if called upon to do so, to deliver shares of that underlying stock. Since you own the stock (hence the term “covered”), this should be a very simple procedure. Your brokerage firm must approve you for this type of transaction, and there may be additional paperwork that must be filled out with your broker. Since, in your example, you own the underlying shares, there should be no additional margin required to do this transaction. Be aware that the owner of the option controls if and when they would like to exercise their option and take delivery of the shares of stock. This can happen with stock (or equity) options any time between the time you sell (or write) the option and the expiration date.

Is there such a thing as a covered put?

The answer depends on your definition of “covered”. One definition of covered put is the sale of a put AND the placing of 100% of the price of the underlying in cash or T-Bills. This is also known as a “cash-secured” put sale. Almost all securities firms allow this, and some allow this in retirement accounts.

Most firms do not recognize the sale of a put and shorting the underlying stock as being a “covered put”. Rules vary from brokerage firm to brokerage firm, we suggest you asking yours what they allow for you.

I would like to write a covered call on an equity, while holding a LEAP instead of the underlying stock. Is this possible?

Owning a LEAPS call and writing a call against it, like a covered call on an equity, is allowed. Owning the LEAPS call instead of the underlying stock, gives you better leverage and limited risk if the underlying stock drops sharply in price. This is a popular strategy we see investors use.

There are several items to be aware of with this strategy. Owning a LEAPS call does not entitle you to the dividend, if any, that a shareholder would have a right to. Be aware that a small number of brokerage firms categorize this strategy as a "spread transaction," that is buying one option and selling another. Although some would say that this type of strategy is less risky than a covered write with stock, you may need special permission from your brokerage firm to transact a spread. One last note: A covered write is fairly straightforward when the short call is in the money and assigned. With the LEAPS covered call, if the short call is assigned there could be additional transaction costs to either exercise toe LEAPS call or to purchase stock to make delivery.