Cash-Secured Puts vs. Covered Calls: What are They? And How I Use Each to Generate Income
Wheel Strategy? Cash-secured puts? Covered calls? What is all this?
I’ve talked a lot about generating monthly income by using the Wheel Strategy - centered around options trading and cash-secured puts and covered calls. OK Hung, great, but I’m new to all this, what the hell are you talking about? What are these terms? If you fall into that category, no sweat! I’ll try my best to run down the basics.
When most people hear the word “options,” they think of risky bets or complicated trades that blow up accounts.
But the truth is — options can be simple, repeatable, and income-focused… if you use the right tools.
At the core, The Wheel Strategy are just two things:
✅ Cash-Secured Puts
✅ Covered Calls
In this post, I’ll walk you through:
What each of these actually means (in plain English)
How I use them to collect weekly and monthly income
How to open these trades inside your brokerage
Real-world examples
Common mistakes to avoid when getting started
🔹 What Is a Cash-Secured Put?
Plain English:
You’re agreeing to buy a stock at a specific price by a specific date.
In exchange, someone pays you upfront — that’s your premium.
You’re using cash in your account to secure the possibility of that purchase. That’s why it’s called cash-secured.
It’s like getting paid to place a limit order.
💡 Why I Use CSPs
I get paid to wait for a dip on a stock that I want to own
If the stock doesn’t drop, I keep the premium
If it does — I buy it at a “discount”
🧾 Example:
TSLA is currently trading at ~$270
Sold 1 contract for a TSLA $250 Put, 1 week out
Collected $300 premium
Collateral required: $25,000 (1 contract is always an agreement to buy 100 shares)
Outcome:
If TSLA stays above $250 → I keep the entire $300
If it dips below $250 → I buy 100 shares at $250 per share (and still keep the premium)
Either way, I win as long as I’m OK owning the stock.
🖥 How to Open a CSP (Broker Example)
Go to your trading platform (Robinhood, Fidelity, E-Trade, etc.)
Select the ticker you wish to trade. In this example, TSLA
Select “Sell to Open” > Put Option
Choose:
Expiration: A Friday 2-4 weeks from today (option contracts are on a weekly Friday basis)
Strike: $250
Make sure you have $25,000 in cash available (for 1 contract)
Submit the trade
When done correctly, your open position should show a “-1” contract position. Congrats! You’re first CSP is open!
🔸 What Is a Covered Call?
Plain English:
You already own 100 shares of a stock.
You’re offering to sell it at a certain price (strike) — and getting paid upfront to make that offer.
If the stock goes up and hits that price, it’s sold. If not, you keep the shares and the premium.
💡 Why I Use Covered Calls
It generates extra income from stock I already own
It gives me a clear exit point
If shares are “called away,” I made money and can repeat the cycle
🧾 Real Example:
Owned 100 shares of TSLA @ $250
Sold $275 Covered Call, 1 month out
Collected $1,030 premium
Outcome:
If TSLA closes above $275 → shares get sold at $275 + I keep premium
If it stays below $275 → I keep shares + premium
Either way, I’m locking in returns and reducing cost basis. This is a great way to earn income and capitalize on price movements above your cost basis!
🖥 How to Open a Covered Call
Make sure you own 100 shares of the stock
Select “Sell to Open” > Call Option
Choose:
Ticker: TSLA
Expiration: 30-45 days from Friday
Strike: $275
Confirm 100-share minimum
Submit trade
🔄 How I Use Both: The Wheel Strategy in Motion
These two strategies are the engine of The Wheel.
Here’s how they work together:
Start with a Cash-Secured Put
→ If assigned, move to step 2Sell a Covered Call on the shares
→ If called away, restart the process with a new CSP
It’s a loop — I don’t try to time the market.
I get paid to stay patient and follow the system.
🚫 Common Mistakes to Avoid
Sounds simple enough. But is it guaranteed? All strategies aren’t without risk, and the Wheel Strategy is no exception (e.g., the stock could fall well below your cost basis and premiums can be low at the time of opening), but if you stick to the plan and remember the main reason for opening a CSP (aka own stocks you want to own), it’s a great strategy that will pay out in the long run.
Here are common mistakes to avoid:
❌ Selling puts on stocks you don’t want to own
❌ Selling puts or calls right before earnings (volatile price swings)
❌ Forgetting to check how much collateral you actually need
❌ Selling covered calls well below your cost basis
❌ Going too far out-of-the-money and collecting pennies
✅ Final Thoughts
These aren’t flashy trades.
They don’t go viral on social media.
They’re not going to 10x your account overnight.
But they work.
Cash-secured puts and covered calls are the building blocks of how I generate consistent income each month — while working full-time and keeping my risk in check. I’m passively building income, while actively working my regular job, so that I can continuously supply my passive income! It’s like a wheel 🎡 in itself!
If you’re looking for a way to trade smarter, not harder — I believe this is the foundation.
—
HL Financial Strategies
