Yield Based Options: What You Need to Know
Yield-based options, also called yield enhancement strategies, add income to a portfolio by selling options and collecting the premium. The two most common are covered calls (selling calls against shares you own) and cash-secured puts (selling puts while holding enough cash to buy the shares). The premium raises the income from a holding, but it is not free: covered calls cap your upside at the strike, and cash-secured puts oblige you to buy the stock at the strike even if it has fallen further. Neither strategy removes the risk of owning the stock.
How yield enhancement with options works
You sell an option and receive the premium up front. If the option expires worthless, you keep the full premium and can sell another. If it finishes in the money, you either deliver your shares at the strike (covered call) or buy shares at the strike (cash-secured put). The annualized "yield" is often estimated as the premium divided by the capital committed, scaled to a year.
Common yield enhancement strategies
- Covered call: own 100 shares, sell one call above the current price. Adds income; gives up gains above the strike.
- Cash-secured put: hold cash equal to 100 shares at the strike, sell one put below the current price. Earns income while waiting to buy a stock at a lower price; you must buy if the stock falls below the strike.
- Collar with income: own shares, sell a call and use part of the premium to buy a put, trading upside for downside protection.
Risks and trade-offs
- Capped upside: covered calls give up gains above the strike, which can be large in a strong rally.
- Downside remains: the premium only cushions a small decline; a large drop in the stock still causes losses.
- Assignment: you can be assigned early, especially around ex-dividend dates.
- Volatility: higher implied volatility means larger premiums, but it also reflects a higher chance of big moves.
Risk-adjusted returns and reward to risk
Selling options changes the shape of returns: it adds steady income in flat or slightly rising markets and gives up part of the gains in strong markets. Whether this improves risk-adjusted returns depends on the strikes, the premium received and the market path; it is not guaranteed.
Analyzing yield strategies with MarketXLS
MarketXLS is an Excel add-in that returns option chains and quotes through formulas such as =QM_GetOptionChain("AAPL"), so you can compare premiums and annualized yields across strikes and expirations in a spreadsheet. Options data is end-of-day on the Standard plan and real-time on the Advanced and Business plans. This article is educational and not investment advice.
Search for all templates in the MarketXLS templates library.
Relevant blogs that you can read to learn more about the topic
How Are Options Priced?
Black Scholes Excel
Investing in Consumer Staples Sector
Marketxls New Release Version 9.3
