Is it better to own stocks or hold cash when trading options?

It actually depends on your strategy, risk tolerance, and objectives. Here’s a quick analysis:

1. Covered Call Strategy

You own the stock and sell call options to earn premiums.

Advantages:

• Reduces risk since you already own the underlying asset.

• Generates income if the stock price stays below the strike price.

• Best For: Investors looking for steady income and willing to cap upside potential.

2. Protective Put Strategy

You buy put options while holding the stock to protect against downside risk.

Advantages:

• Limits potential losses on the stock.

• Suitable for hedging during uncertain markets.

3. Dividend Collection

If you own dividend-paying stocks, you can combine holding the stock with options strategies to enhance returns.

1. Cash-Secured Puts

You sell put options with enough cash in your account to buy the stock if assigned.

Advantages:

• Generates income (the premium) without owning the stock upfront.

• Provides a disciplined approach to buying stocks at a discount (strike price minus premium).

• Best For: Investors willing to buy stocks at lower prices.

2. Flexibility and Reduced Risk

Holding cash gives you the flexibility to take advantage of opportunities without being tied to specific stocks. Essentially reduces the risk of losses due to stock price fluctuations.

3. Options-Only Strategies

• Strategies like buying calls, puts, or spreads don’t require stock ownership and may suit traders who focus purely on options for leverage or directional bets.

1. Capital Requirements

• Owning stocks requires significant upfront capital.

• Cash allows for more diverse options strategies.

2. Risk Tolerance

• Stock ownership carries the risk of market downturns.

• Cash reduces exposure to underlying asset volatility.

3. Market Outlook

• If you’re bullish on a stock, owning it may make more sense for strategies like covered calls.

• If you’re neutral or bearish, it makes more sense holding cash and using cash-secured puts.