We frequently state that we should only sell covered calls and cash-secured puts using SPY (an exchange-traded fund tracking the S&P 500, which is the American economy as a whole) and never buy them.
Who does buy them?
By buying call options on SPY, investors can control shares for a fraction of the cost of buying SPY. If SPY rises, investors benefit as if they owned SPY. If SPY drops, investors lose 100% of their money, but they will get to keep the premium income regardless.
If they owned SPY instead of options, they would only lose the same percentage of money as the drop in SPY, knowing that it would recover and continue to rise.
Buying put options on SPY investors hope that it declines. That is similar to selling SPY short. If SPY rises, investors lose 100% of their money.
Investors who sell SPY short hope to profit from its decline. They borrow SPY shares and hope to repurchase them for less money. The big risk of short selling is that if investors guess wrong and SPY rises, they will suffer infinite losses.
Don’t go there. Only sell covered calls and cash-secured puts and keep the premium income.
My income and Rosi’s primarily comes from doing that.
