The previous segments outlined and described the similarities and differences between covered calls and naked puts. While there are similarities between these two techniques, they are actually very different. Since this subject is somewhat difficult to understand, this segment will summarize the similarities and differences to give the investor a clearer understanding.
The main similarities between covered calls and naked puts are:
Investors are selling option contracts and profiting from the premium.
Investors are hoping that stock price will stay the same or increase.
Choice of the underlying stock for each strategy is similar.
Exit strategies used are similar.
The main differences between covered calls and naked puts are:
Naked puts involve a higher level of option clearance.
Naked puts cannot be used in an IRA account.
Naked puts involve more risk for your broker.
Naked put sellers run the risk of over-leveraging themselves.
Naked puts are a “Bull-to-Bear” transaction.
Covered calls produce larger option premiums.
Covered calls have more downside protection.
For a more detailed explanation of any of the previous similarities or differences, please refer to the previous segments.
Different investors choose different investment vehicles based on their personal investment goals, risk tolerance and knowledge. Naked puts appeal to a certain percentage of investors, as does covered calls. My biggest concern with naked puts is the fact that investors receive less of a premium on the sale of the option. The reduction in the price of the option leads to less profit and less downside protection, which are some of the real benefits of covered calls. Furthermore, while it may appear to some investors that naked puts are a better strategy based on the fact that you do not have to buy the underlying stock, investors need to realize that they are still RESPONSIBLE for buying the underlying stock, if called upon to do so. Overall, I personally find puts to have less profit potential, less downside protection and more risk than covered calls.
Investors are constantly looking for tools and techniques that “beat the market.” I get many questions each day concerning different techniques and strategies related to covered calls, as well as alternatives strategies to covered calls. Upon evaluating these strategies, I have yet to find an investment method that exceeds covered call writing in both return and safety. There are definitely investment strategies that could produce better gains than covered calls, but all of the ones that I have seen involve significantly more risk. Furthermore, I have yet to find any stock investment strategy which, in my opinion, provides as much safety as covered calls.
Calls vs. Puts 
