How to Choose an Options Strategy? A In-Depth Comparison of the Advantages and Risks of Covered Calls and Covered Puts

Want to generate extra income from your holdings or build positions at a lower cost but worried about involuntary assignment or frozen capital? This article compares two of the most commonly used seller strategies in the Chinese market (SSE/SZSE ETF options and CFFEX index options)—Covered Call and Cash-Secured Put—evaluating them based on returns/risks, margin and capital usage, exercise and settlement, dividends and contract adjustments, Greeks exposure, and applicable scenarios to help you make informed choices in the 2025 regulatory and market environment. All rules cited are based on exchange and broker materials, marked as “as of October 2025.”

1. What Are the Strategies: Structure and Intent (China Market Context)

• Covered Call: Holding a long position in the underlying ETF or stock while selling an equivalent amount of call options. The intent is to enhance cash flow from premiums, accepting the opportunity cost of capped upside. In China’s ETF options, “covered opening” is used, requiring sufficient underlying holdings, with brokers performing position verification/locking.
• The more common form of covered put in China: Cash-Secured Put. This involves holding sufficient cash and selling put options; if assigned, the underlying is purchased at the strike price, equivalent to “building a position at a discount.” The overseas variant of “shorting the underlying + selling puts” is less common due to high borrowing costs and regulatory restrictions.

China’s ETF options use European-style exercise and physical settlement, with a typical contract unit of 10,000 shares. Key details are available on the SSE’s contract terms page (e.g., CSI 500 ETF options, published in 2023 and still applicable in 2025)—see SSE · CSI 500 ETF Options Contract Terms (European, 10,000 units).

2. Return/Risk Structure: Maximum Profit, Maximum Loss, and Break-Even Point

The following is a general framework (excluding varying broker commissions, settlement fees, and slippage).

• Covered Call (Long Underlying + Sell Call)
  • Maximum Profit: When the underlying ≥ strike price K, upside is capped. Approximately (K − cost basis of underlying) × contract unit × number of contracts + premium received − costs.
  • Maximum Loss: If the underlying falls significantly to near zero, the loss is approximately (cost basis − 0) × contract unit × number of contracts − premium received (premium provides limited cushion).
  • Break-Even Point: Approximately cost basis − premium received per contract/contract unit.
  • Opportunity Cost: In a sharp rally, “forced selling” occurs—your upside is capped at K.
• Cash-Secured Put (Cash Collateral + Sell Put)
  • Maximum Profit: Premium received (realized if not assigned at expiration).
  • Maximum Loss: If assigned and the underlying continues to fall, theoretically, if the underlying drops to zero, the loss is approximately (K − 0) × contract unit × number of contracts − premium received.
  • Break-Even Point: Approximately K − premium received/contract unit.
  • Core Implication: Willing to buy the target underlying at a “discount price” (K − premium/unit), bearing subsequent holding risk.

3. Greeks Exposure and Market Fit: Direction, Volatility, and Time

Both are seller strategies, typically with:

• Theta (time value) positive: Time decay is beneficial.
• Vega (volatility) negative: Rising implied volatility is generally unfavorable.

Differences lie in Delta and market path:

• Covered Call: Net Delta is usually positive (long underlying is positive, sold call is negative), suitable for neutral to mildly bullish environments with declining or stable volatility. In a sudden sharp rally, the “capped upside” opportunity cost becomes significant.
• Cash-Secured Put: Net Delta is generally slightly positive, profiting in uptrends or sideways markets; however, in rapid declines or spikes in implied volatility, floating losses and capital usage increase significantly. Suitable for investors willing to buy at the strike price and hold long-term.

4. Exercise, Settlement, and “Assignment”: How It Works in China

• ETF Options (SSE/SZSE)
  • Exercise Method: European, exercisable only on expiration day. Both SSE and SZSE official pages confirm this; for example, SZSE’s 2025 product page still specifies European style and settlement details—see SZSE · Options Product Page (Contract Units, Exercise/Settlement Dates).
  • Settlement Method: Physical settlement (delivering the underlying ETF shares).
  • Timeline: Typically, the fourth Wednesday of the month is the exercise date (postponed for holidays), with settlement completed the next trading day. For 2025, SZSE periodically publishes expiration/settlement schedules, e.g., SZSE · September 2025 Options Expiration and Settlement Notice.
  • Covered Opening: Requires sufficient underlying shares, with brokers performing position verification/locking (specific processes vary by broker).
• Index Options (CFFEX)
  • Exercise Method: European.
  • Settlement Method: Cash settlement; settlement price is the arithmetic average over a specified period (typically the last 2 hours) on expiration day. Rules are specified in CFFEX’s latest guidelines—see CFFEX · Options Trading Rules (2024 Revision, Applicable in 2025).
  • Timeline: The third Friday of the expiration month is typically the last trading day, exercise day, and settlement day, with positions meeting automatic exercise thresholds processed per rules.

Practical Reminder: Brokers issue operational reminders before expiration and settlement. For example, Citic Securities’ June 2025 notice outlines ETF option expiration and settlement procedures—see Citic Securities · ETF Options Expiration/Settlement Notice (2025-06).

5. Dividends, Ex-Rights, and Contract Adjustments: No “Early Exercise,” but Watch Announcements

China’s ETF options are European, with no exercise before expiration. When the underlying ETF undergoes dividends/ex-rights, exchanges adjust the strike price, contract unit, and contract name/code for unexpired contracts, relisting them on the effective date. Covered positions must monitor contract unit changes and adjust underlying holdings to ensure coverage. For example, SSE’s June 2025 adjustment for CSI 300 ETF options details rules and effective dates—see SSE · CSI 300 ETF Options Contract Adjustment Notice (2025-06).

6. Margin and Capital Usage: Significant Relief for Covered, Cash-Secured Needs “Buffer”

• Covered Call: With underlying assets as collateral, margin requirements for selling calls are significantly lower than naked calls. The main usage is locked underlying shares and minimal trading costs. Upon exercise, physical settlement fulfills obligations without additional borrowing.
• Cash-Secured Put: Brokers freeze funds/margin based on exchange frameworks and proprietary risk models to cover potential “buy at K” obligations. Parameters (e.g., implied volatility, days to expiration, in/out-of-the-money status, underlying volatility factors) vary by broker, and no consistent public formula or example exists as of October 2025. Therefore, in practice:
  • Estimate capital usage via the trading platform’s margin calculator or stress test before placing orders;
  • Reduce position size and shift to higher-quality underlyings during high-volatility periods or event windows (rebalancing, earnings, macro data);
  • Maintain a cash buffer to avoid forced liquidation from margin calls triggered by volatility.

7. Strategy “Personality” Comparison: Choose Based on Scenarios, Not Winners

• If you “already hold the underlying, want to generate income, and accept capped upside”: Lean toward Covered Call.
  • Advantages: Stable cash flow, positive Theta; friendly in sideways/mildly bullish markets.
  • Risks/Costs: Upside capped; potential to miss sharp rallies; need to manage contract unit changes post-dividends.
• If you “want to buy the target ETF at a discount and are willing to be assigned”: Lean toward Cash-Secured Put.
  • Advantages: Earn premiums if not assigned; if assigned, equivalent to buying at a discount, friendly for long-term holders.
  • Risks/Costs: Floating losses and capital usage rise in sharp declines or volatility spikes; post-assignment shifts to holding risk management.
• Market Fit (Qualitative):
  • Sideways/Mild Rally: Both viable, Covered Call more intuitive.
  • Sharp Rally: Cash-Secured Put more flexible; Covered Call faces “capped upside.”
  • Sharp Decline: Both unfavorable; Covered Call pressured by underlying losses, Cash-Secured Put risks assignment and further downside, requiring protective legs or stop-loss strategies.

8. China Market Regulatory Differences and Operational Notes (SSE vs. SZSE vs. CFFEX)

• SSE/SZSE ETF Options Commonalities: European exercise, physical settlement, typical contract unit of 10,000 shares, exercise day usually the fourth Wednesday of the month (postponed for holidays), settled the next day. Official terms and calendars are available on their websites; e.g., SSE specifies European style and units—see SSE · CSI 500 ETF Options Contract Terms (Applicable in 2025), and SZSE discloses expiration/settlement details—see SZSE · Options Product Page.
• CFFEX Index Options: European, cash settlement; settlement price is the arithmetic average over a specified period on expiration day. Details are in CFFEX · Options Trading Rules (2024 Version).
• Contract Adjustments and Announcement Tracking: During dividends/ex-rights, exchanges list adjustments to strike price, contract unit, and name/code with effective dates. Covered positions must verify unit changes (e.g., from 10,000 to 10,050 shares) to avoid naked positions. See SSE’s adjustment case—CSI 300 ETF Options Contract Adjustment Notice (2025-06).

9. Operational Checklist

• Before Placing Orders
  • Confirm underlying and contract: unit/expiration/month, European exercise, settlement method (ETF physical, index cash).
  • Covered Call: Ensure account holdings ≥ contract unit × number of contracts; confirm broker’s auto-locking mechanism and shortfall procedures.
  • Cash-Secured Put: Use trading platform to estimate frozen funds and conduct stress tests; maintain cash buffer.
• During Holding
  • Monitor implied volatility and price paths; roll positions if needed (close and reopen at new expiration/strike) or add protective legs (e.g., buy lower strike puts/higher strike calls).
  • Track dividend/ex-rights announcements and contract adjustment effective dates to ensure covered units match.
• Expiration/Exercise
  • ETF: Exercise processed after market close on expiration day, settled the next day; post-assignment share/cash changes follow settlement rules. Brokers typically issue reminders, e.g., Citic Securities’ June 2025 notice: ETF Options Expiration/Settlement Notice.
  • Index: Automatic exercise and cash settlement on expiration day per rules—see CFFEX · Options Trading Rules.

10. Common Misconceptions and Quick FAQ

• Can ETF options be exercised early?
  • No. European contracts are exercisable only on expiration day; dividends/ex-rights are handled via contract adjustments, not early exercise. SSE and SZSE rules and announcements in 2025 confirm this—see SSE · Contract Terms Page (European Details) and SZSE · Options Product Page (Exercise/Settlement Details).
• Does covered opening always involve “locking”?
  • Yes. To ensure fulfillment, brokers/settlement agencies perform position verification/locking. Details depend on the broker’s rules and trading platform prompts.
• How is margin calculated for Cash-Secured Put?
  • Determined by exchange frameworks + broker risk models; parameters vary. As of October 2025, no authoritative public formula exists. Rely on your broker’s real-time calculations and estimates, and maintain a safety buffer.

Conclusion and Risk Warning (As of October 2025)

In China’s market, Covered Call suits investors with existing holdings seeking income and accepting capped upside; Cash-Secured Put suits those willing to buy the underlying at the strike price and bear post-assignment holding risks. Both are seller strategies with tail risks and volatility sensitivity. Combine with your capital size, risk tolerance, long-term view on the underlying, and broker margin parameters, starting with small positions and building discipline.

Disclaimer: This article is for strategy comparison and educational purposes, not investment advice or guarantees. Options are high-risk instruments; fully understand rules and rely on the latest exchange and broker announcements.

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