Folks love to sell puts in persistent market rallies. Makes sense: they tend to go to zero. But what has better overall success in a bull market, put sales or covered calls? You might be surprised to find out.
Selling an out-of-the-money call (OTM) against stock is net “longer the market” than selling an out-of-the-money put. By a lot. Let’s use deltas to illustrate.
Recall that delta gives you a good idea of how your position will move versus the underlying stock movement.
When short an OTM put I might be long around 25 deltas (remember long stock is long 100 deltas). But when long a covered call I might be net long around 75 deltas, which is 100 deltas on the stock, less 25 deltas for the short call. So, overall the short put is going to act like +25 shares, and the long covered call position is going to act like +75 shares.
Now do you see which one can make you more money? Longer deltas = better upside in a strong market. This happens because being short an OTM put is really a more neutral (slightly up, slightly down) trade. Yes, I know, the textbook says it’s a bullish strategy…don’t worry, that’s why you’re listening to a pro 🙂.
So why do people love to sell OTM puts in bull markets? Because it feels good to be right, and selling puts that go to zero offers a high hit rate. The difference is that with covered calls, even though your call strike will get run over every now and then, the overall combination of long stock and short call is set up to do better when stocks are strong.
Our Cash Flow Insiders Investment System takes advantage of this. Check it out.
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