In this video, I discuss about cash covered puts. Enjoy!
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How do options work
0:00 – Intro
0:24 – What is cash covered put
Cash covered is an option strategy where you sell put options to another person, and you’ll get paid the option price. However, he is now able to sell 100 of his stocks to you at a fixed price. He will do so if the stock price goes below the option’s strike price.
2:21 – Pros of cash covered put
By selling cash covered put, you’ll get paid, and at the same time, get to buy the stocks at the price you want. This strategy is also being used by Warren Buffett.
According to a study, around 76.5% of options expire worthless. So most of the time, you will be getting free money.
3:37 – Cons of cash covered put
Cash covered put requires you to buy 100 stocks if needed, that’s why it is very cash intensive. However you can sell cash covered put on cheaper stocks.
Another cons is you might be catching falling knives. Even though you may be able to receive alot of money, if the underlying stock continues to go down, you be catching falling knives and suffer heavy losses.