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Financial Literacy: The Case for Integrating Defined-Risk Option Strategies into Defined Contribution Plans in the United States Cover

Financial Literacy: The Case for Integrating Defined-Risk Option Strategies into Defined Contribution Plans in the United States

International Review of Financial Consumers
Volume 11 (2026): Issue 1 (June 2026)
By:  and    
Open Access
|Jun 2026
Figures & tables

Figures & Tables

Figure A1.

Comparing buying to selling a call with the same strike price and DTE.

Figure A2.

Comparing the probability of profit between buying and selling a SPX put with strike price at $6,700.

Figure A3.

Comparing the probability of profit from buying a SPX put with a strike price at $6,700 versus $7,200. The SPX was trading around $6,954.

Defined-risk option strategies

StrategyNotes
Generate Cash Flow in Stagnated or Sideways Market
Covered call: hold the underlying asset and sell OTM call

  • Option contracts are sized to match the number of shares of the underlying asset held

  • No additional margin for short call beyond the stock holding

  • Receive call premium and participate in some upside capped at the call strike price

  • Maximum gain is strike price plus premium received minus stock purchase price

  • Maximum loss is call premium received minus loss incurred from holding the stock

Protect Underlying Asset from Severe Drawdowns
Protective put: hold the underlying asset and buy OTM (or ATM) put

  • Option contracts are sized to match the number of shares of the underlying asset held

  • No margin required for long puts

  • Maximum gain is unlimited

  • Maximum loss is premium paid plus the unprotected portion of loss in the underlying asset

Protect Underlying Asset from Severe Drawdowns at Reduced Cost
Collar: hold the underlying asset, buy OTM put and sell OTM call

  • Option contracts are sized to match the number of shares of the underlying asset held

  • No margin for long puts and short call is backed by the underlying asset

  • Maximum gain is call strike price minus stock purchase price plus net premium (call premium received minus put premium paid)

  • Maximum loss is net premium minus the unprotected portion of loss in the underlying asset

Mitigate Severe Drawdowns by Using Cash Secured Call
Cash secured call/Fiduciary call: buy call and invest cash in risk-free asset

  • Cash invested in the risk-free is just sufficient to buy the underlying asset

  • No margin required for long call

  • Maximum gain is unlimited

  • Maximum loss is call premium paid

Limited Upside (Bull Spread) or Downside (Bear Spread) Participation with Preset Losses
Bull Spreadi. Call spread: buy call at X1 and sell at X2 where X2 > X1

  • Maximum gain is (X2-X1) minus net premium paid

  • Maximum loss is net premium paid

ii. Put spread: buy put at X1 and sell at X2 where X2 > X1

  • Maximum gain is net premium received

  • Maximum loss is (X2-X1) minus net premium received

Bear Spreadi. Put spread: sell call at X1 and buy at X2 where X2 > X1

  • Maximum gain is (X2-X1) minus the premium paid.

  • Maximum loss is net premium paid

ii. Call spread: sell put at X1 and buy at X2 where X2 > X1

  • Maximum gain is net premium received.

  • Maximum loss s (X2-X1) minus net premium received

DOI: https://doi.org/10.2478/irfc-2026-0005 | Journal eISSN: 2508-464X | Journal ISSN: 2508-3155
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Language: English
Page range: 49 - 62
Published on: Jun 30, 2026
Published by: International Academy of Financial Consumers
In partnership with: Paradigm Publishing Services
Keywords:
ERISA,
covered call,
protective put,
collar,
vertical spread,
probability of profit
Related subjects:
Business and economics,
Political economics,
Economic policy,
Business management,
Corporate social responsibility (CSR), compliance management, business ethics,
Industries,
Banks, financial service provider, insurers,
Law,
Commercial law,
Consumer protection

© 2026 Nicholas S.P. Tay, Sherise Kimura, published by International Academy of Financial Consumers
This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 3.0 License.

Volume 11 (2026): Issue 1 (June 2026)
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