Put-write strategies

The steps below are the order the trade is actually placed in, and the order matters: what has to be in the account before an option can be sold is what makes the obligation coverable. None of the steps mentions a price, because there is no options-chain feed behind this site — nothing on this page is a quote, and no premium named anywhere here is one that exists in the market today.

1. Pick a broad-based index option rather than a single name, so the position cannot be wrecked by one company's news.
2. Sell a put — commonly at or slightly below the current index level — and hold the full notional in cash or Treasury bills as collateral.
3. Collect the premium up front and the interest on the collateral over the cycle. Both are part of the return.
4. At expiration the option settles in cash: nothing if the index is above the strike, a cash debit if it is below.
5. Write the next put and repeat. The programme is mechanical by design — the discipline is the strategy.
6. Published rules-based versions of this exist as index methodologies and as funds, so the approach can be bought rather than run by hand.

Every line below is a rule of how the contract works, not a forecast and not a price. None of it moves when the market moves.

What pays you

Option premium plus interest earned on the Treasury-bill collateral. Those are two genuinely different kinds of income sitting in one number, and only the second one is interest.

Best case

The premiums collected plus the collateral interest. The strategy never owns the index, so it never participates in an index rally beyond the premium it was paid.

Worst case

The index falling to zero, less the premiums collected — the collateral is what absorbs it. Losses in a fast decline arrive far faster than premiums can rebuild them.

Breakeven

Per cycle: strike minus premium. Cumulatively: premiums and collateral interest collected, against the index's decline.

Capital required

The full notional of the index contract in cash or bills per contract. Index contracts are large, so this is the least accessible of the do-it-yourself strategies for a small account.

Broker approval

Index option writing; higher approval level and a margin agreement at most brokers.

Assignment

Broad-based index options are usually European-style and cash-settled: no early assignment and no shares delivered, just a cash settlement at expiration. That removes the assignment surprise but also removes the option of taking delivery and waiting.

Why tax gets its own box here rather than a line at the end. Premium is not taxed the way a dividend is, the treatment can change depending on whether the contract expires, is bought back or is assigned, and being assigned turns an option trade into a share sale or a share purchase with its own consequences. The note below is the general US structure, not advice, and not a substitute for asking someone about your own return.

This is the half of the trade that arrives later. The premium is collected once, at the start, and it is the whole of what this position can pay. The obligation behind it runs for the entire life of the contract, and the list below is what that obligation costs when the market moves through it rather than around it.

Full explainer in the Learn library: Put-write strategies. Run your own numbers with the covered-call yield calculator.