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Focusing on outcomes of Covered Calls and Sold Puts, not P/L of the option





Disclaimer: everything I'm discussing is for educational purposes only. I am not a professional financial advisor, nor am I making any claims about my success or implying my views are accurate. This is just my opinion.

Selling puts and covered calls are two of my favorite options trading strategies. When I execute my plan correctly, both strategies have been my most profitable and consistent income generators in almost all market conditions . Today I'm not writing about the exact strategy, feel free to email me or join our discord at Good Kids Trading (GKT) and we can get more in-depth on the specifics of the strategies.

I want to discuss why I don't closely track the P/L for these strategies and explain why looking at the P/L can be misleading and may cause unnecessary concern for traders. For me it is important to focus on the outcome of the trade and whether the option expires in the money (ITM) or out of the money (OTM). This is probably obvious but I want to mention a covered call is very safe options strategy and selling a put holds more risk as you are obligating yourself to buying shares and stocks can go to zero. I think selling puts can be an amazing and profitable strategy if done responsibly and if you follow a plan.

When selling covered calls, the key for me is to only sell calls at strike prices where I am willing to sell my shares. This way if the option is exercised and my shares are called away, I will still collect the premium and the trade will be profitable. Additionally, as previously discussed I always setup GTC orders to close the call at a certain profit level, such as 50-75% of the premium collected.

For example: if you collected 1.00 by selling covered call at the 100 strike you are agreeing to sell your shares at $101 a share. If the stock rampages higher and goes to $105 your P/L for that covered call may show you are down as much as $400! I encourage you to not panic, this is just reflecting the profit you missed out by selling the call too soon. Depending on the days to expiration (DTE) you will also have time priced into this "loss" you see on the P/L. It doesn't matter, the only thing that really matters is if your call expires OTM at 0 DTE you collect all your premium and keep your shares! If the stock goes to 200 you just agreed to sell your shares at $101 a share. If you sold the call at resistance it's possible the shares roll back down and you don't even lose the shares even though you were "down" for the majority of the trade: the option P/L doesn't really matter.

Similarly when I sell puts, I mainly sell puts on stocks that I don't mind owning and at levels where there is good weekly support and the POP and P50 are high (disclaimer I do trade puts other ways sometimes if there is a large over reaction). Just like I do with covered calls I set a GTC order to close the put for 50-75% of the premium received. If the option expires worthless, I keep the premium and the trade is profitable. However, if the stock drops and my put expires in the money, I am obligated to buy the shares at the strike price. In this case, the premium you collected can help offset any potential losses. I watch the underlying and I know how to hedge if my put is heavily challenged. Normally, I take the shares and start selling covered calls until I'm called away because I like the company and sold a put at a strike price that I liked.

For example: If you sell a put for $1.00 at the 100 strike. You are agreeing to buy shares at $99 a share. If the stock closes at 101 at 0 DTE you collect all of the premium. But, if the stock drops to 95 your P/L will show a sizeable loss. This is an actual loss and sold puts can also carry the risk of early assignment, so as I've said repeatedly please understand how to trade puts mechanically and understand the risk, but my point is: if you are willing to own that company at $100 a share, selling puts a powerful way to collect premium without having to buy shares of the underlying, and watching the P/L is not as important to me as just watching the underlying stock price in case I need to hedge my put.

Overall it's more important for me to focus on the outcome of the trade rather than the P/L of the Covered Call or Put Sale. Understanding the difference between the two can help traders make more informed decisions, not trade out of fear, and increase the chances of success.

If you're interested in joining a community of traders and learning more about these strategies, consider joining Good Kids Trading (GKT) by clicking here.

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