Covered Calls

A covered call is one of the most popular and straightforward options strategies for beginners. It’s a way to earn extra income on stocks you already own.

How It Works:

In a covered call, you sell a call option on a stock you already hold. By doing this, you agree to sell your shares at the option’s strike price if the buyer decides to exercise the option before it expires. In exchange, you collect a premium upfront.

Why Use It:

Covered calls can generate additional income if you think your stock will trade flat or slightly higher but won’t surge dramatically above the strike price before expiration. If the stock stays below the strike, you keep both the premium and your shares.

Example:

Suppose you own 100 shares of XYZ stock, currently trading at $50. You sell a one-month $55 call option for a premium of $2 per share. If XYZ stays below $55, you keep your shares and pocket $200. If XYZ rises above $55, you must sell your shares at $55, but you keep the premium plus the profit from the price increase.

Key Points:

  • Good for generating extra income.
  • Works best in sideways or moderately bullish markets.
  • Risk: If the stock rises sharply, your upside is capped at the strike price plus the premium received.

Cash-Secured Puts

A cash-secured put is another simple, beginner-friendly strategy that lets you buy shares at a discount or collect income if the stock doesn’t drop.

How It Works:

You sell a put option on a stock you’d like to own at a lower price. In return for selling the put, you receive a premium. You must have enough cash in your account to buy the stock if assigned.

Why Use It:

Cash-secured puts are popular with investors who want to own shares but would prefer to buy at a lower price. If the stock stays above the strike price, the put expires worthless, and you keep the premium. If the stock falls below the strike, you buy it at that price, which could be lower than the market price when you first sold the put.

Example:

You want to buy XYZ stock, which trades at $50. You sell a one-month $45 put for $1 per share. You collect $100 upfront. If XYZ stays above $45, you keep the premium. If it drops below $45, you buy 100 shares at $45, effectively paying $44 per share when you account for the premium.

Key Points:

  • Great for getting paid to wait for a better price.
  • Provides some downside cushion via the premium collected.
  • Risk: If the stock drops far below the strike price, you must still buy at the agreed price.

Simple Vertical Spreads

A vertical spread is a slightly more advanced but still beginner-friendly strategy. It can be used to limit risk and define potential profit.

How It Works:

A vertical spread involves buying one option and selling another option of the same type (calls or puts) with the same expiration date but different strike prices.

Why Use It:

Vertical spreads allow you to trade a directional view — bullish or bearish — with defined risk and cost less than buying a single option outright.

Two Basic Types:

  • Bull Call Spread: Buy a lower strike call and sell a higher strike call. You profit if the stock rises but your gain is capped.
  • Bear Put Spread: Buy a higher strike put and sell a lower strike put. You profit if the stock drops but limit your loss if it doesn’t.

Example (Bull Call Spread):

XYZ trades at $50. You buy a $50 call for $3 and sell a $55 call for $1. The net cost is $2 per share ($200 total). If XYZ rises to $55 or higher, you make $5 per share minus your $2 cost, for a $3 per share profit ($300). If XYZ stays below $50, your maximum loss is the $200 premium.

Key Points:

  • Defines both maximum risk and maximum reward.
  • Can cost less than buying a single option.
  • Risk: You need the stock to move enough in your direction before expiration.

Putting It Together

Covered calls, cash-secured puts, and simple vertical spreads give new options traders a solid starting point. They teach you how to generate income, manage risk, and develop a better feel for how options pricing works. Unlike risky, complex strategies, these three help you focus on building good habits and understanding the core ideas behind options trading.

Remember: Always know your maximum risk and reward before you trade. Use these strategies on stocks you already want to own or trade. Take time to practice, start small, and learn from every trade.

By mastering these basics, you’ll have a foundation for more advanced options strategies in the future.