10 Ways People are Making Money Using Options Trading

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From generating consistent income to speculating on market movements, options trading offers flexibility that can be tailored to the risk appetites of both beginners and experienced market players. We aim to simplify stock options trading in this article by breaking down ten popular strategies employed by individuals to crack the market and increase their chances of success.

Covered Call: Generating Income from Owned Stocks

The covered call is one of the most widely used and relatively conservative option strategies. It’s a favorite for many income-focused investors. It involves owning shares of a stock (the “covered” part) and simultaneously selling (or “writing”) call options against those shares. A call option gives the buyer the right, but not the obligation, to purchase the underlying stock at a specific price (the “strike price”) before a certain date (the “expiration date”). By selling this right, the investor collects an upfront payment, known as the “premium.” Suppose the stock price stays below the strike price until expiration. In that case, the option expires worthless, and the investor keeps the premium as pure profit, effectively increasing the return on their existing stock holdings. However, if the stock price rises above the strike price, the shares might be “called away” – meaning the investor has to sell their shares at the strike price, limiting their upside profit but still allowing them to keep the premium.

Cash-Secured Put: Aiming to Buy Stocks at a Discount

In the cash-secured put strategy, instead of owning the stock, you sell a put option, agreeing to buy the underlying stock at a specified strike price if the stock falls below that price before expiration. To make this “cash-secured,” you must have enough cash in your brokerage account to cover the potential purchase of the shares. Similar to covered calls, you receive a premium upfront for selling this obligation. If the stock price stays above the strike price, the put option expires worthless, and you keep the premium. If the stock drops below the strike price, you might be “assigned,” meaning you’ll purchase the shares at the agreed-upon strike price, effectively acquiring the stock at a discount (the strike price minus the premium received).

Long Call: Betting on Upside Movement

A long call option provides a way to participate in potential upside movement with a lower capital outlay than buying the actual shares. A long call gives you the right to buy 100 shares of the underlying stock at a specific strike price by a certain expiration date. If the stock price rises above the strike price before expiration, the value of your call option increases, allowing you to sell it for a profit or exercise it to buy the shares at a lower price. Your maximum risk is limited to the premium paid for the option. This strategy offers leverage, as a slight increase in the stock price can result in a significant percentage gain on your option investment; however, it also carries the risk of losing the entire premium if the stock does not move as anticipated.

Long Put: Profiting from Downside Movement

When you buy a long put, you gain the right to sell 100 shares of the underlying stock at a specified strike price by a certain expiration date. If the stock price falls below the strike price, the value of your put option increases. You can then sell the put for a profit or exercise it to sell shares you own (or buy them at the lower market price and immediately sell them at the higher strike price). This strategy can be used for speculation on bearish movements or as a hedging tool to protect existing stock portfolios from potential downturns. As with long calls, your maximum loss is limited to the premium paid for the put option.

Bull Call Spread: Limiting Risk in Bullish Bets

The bull call spread involves simultaneously buying a call option at a lower strike price and selling a call option at a higher strike price, both with the same expiration date and on the same underlying stock. This creates a “net debit” – you pay more for the call you buy than you receive for the call you sell. The advantage is that the cost of establishing the position is reduced compared to buying a single long call outright. Your maximum profit is capped at the difference between the strike prices minus the net premium paid. Still, your maximum loss is also limited to that same net premium, making it a defined-risk strategy.

Bear Put Spread: Limiting Risk in Bearish Bets

The bear put spread involves simultaneously buying a put option at a higher strike price and selling a put option at a lower strike price, both with the same expiration date and on the same underlying stock. This strategy also results in a “net debit.” The goal is to profit from a modest decline in the stock price while limiting potential losses. Your maximum profit is the difference between the strike prices minus the net premium paid, and your maximum loss is limited to that net premium. It’s a way to express a bearish view with a pre-defined risk profile, making it suitable for those who want to mitigate the unlimited risk associated with simply shorting a stock or buying an outright put without selling another.

Iron Condor: Profiting from Sideways Movement

The iron condor involves selling an out-of-the-money (OTM) put spread (selling a put and buying a further OTM put) and selling an OTM call spread (selling a call and buying a further OTM call), all with the same expiration date. The aim is for the stock price to stay between the two inner strike prices until expiration, allowing all four options to expire worthless. You collect a net credit from selling these spreads. The maximum profit is the total credit received, while the maximum loss is limited to the difference between the strike prices of either spread, minus the net credit received.

Straddle: Betting on Volatility (Large Price Movement)

A long straddle is a strategy employed when an investor expects a significant price move in an underlying stock but is unsure of the direction. It involves simultaneously buying both a call option and a put option with the same strike price and expiration date. The cost of setting up this position is the combined premiums of the call and the put. If the stock makes a substantial move either up or down, the profit from one option will ideally outweigh the loss from the other, plus the initial cost of both premiums. The maximum loss is limited to the total premiums paid.

Strangle: A Broader Bet on Volatility

A long strangle is also a volatility play, but it’s often a less expensive way to bet on a big move. Instead of buying a call and a put with the same strike price, a strangle involves buying an out-of-the-money call and an out-of-the-money put with the same expiration date. Because these options are OTM, they are cheaper than in-the-money or at-the-money options. This means you need a larger price movement for the strategy to become profitable, but your initial capital outlay is lower. As with the straddle, the maximum loss is limited to the combined premiums paid.

Collar: Protecting Existing Stock Holdings

The collar strategy involves owning shares of a stock, buying an out-of-the-money put option (for downside protection), and simultaneously selling an out-of-the-money call option (to help finance the cost of the put). The premium received from selling the call can offset some or all of the cost of buying the put, effectively creating a “zero-cost” or low-cost hedge. If the stock falls, the put option gains value, limiting losses. If the stock rises significantly, the call option might be exercised, meaning the shares are sold at the strike price, capping the upside.

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