Unlock a Reliable Source of Income With Options Strategies

Investing is a risky venture, so when you learn about ways to unlock a reliable source of income with options strategies, it likely piques your interest. Options intimidate some new investors, but they can be a great tool for managing risk and earning big rewards if you understand how puts and calls work. Using an options strategy allows you to take advantage of market fluctuations, and there are two main approaches you can use to put money in your pocket or portfolio consistently.

Key Takeaways

• The covered call options strategy allows you to collect a premium that you keep even if the call option expires worthless or you have to sell your shares at the strike price.
• The cash-secured put options strategy allows you to buy a put contract and collect a premium for it, but you have to have enough cash on reserve to cover the put in case the stock hits the strike price by expiry.
• There are many options and strategies you can use to potentially unlock a reliable source of income if you know what you’re doing and have the right tools and advisors on your side.

Covered Call Options Strategy

Some investors have long-term investing strategies, while others prefer to use their investments to earn an income. With a covered call option, you have to own at least 100 shares of stock in a company. You can then write a call option where you agree to sell your 100 shares to someone for a set price, also known as the strike price. They pay you a premium for that right immediately, but you set the date of expiration for the stock to reach the strike price. 

If the stock hits the strike price by the expiry date, you have to sell your shares to the contract’s holder, but you keep the premium. If it doesn’t, you keep the shares as well as the premium. This typically works out well if you are adept at judging the growth of your stock because you may end up collecting a premium for a covered call option several times before having to sell it. As long as the stock never reaches the strike price, you can continue to write covered call options and collect premiums on the same shares.

Example of a Covered Call Options Strategy

Looking at an example of a covered call option helps you understand how you can use this strategy to earn a potentially reliable and repeatable income. Remember, you must own 100 shares of a stock or other asset that you can sell options on to generate income using this options strategy. 

Assume you decide to write a covered call option for your 100 shares of Repeat Income Inc. stock that you paid $20 for originally. The strike price for the stock is $50, a $30 difference from what you paid, and the options contract expires in 30 days. Each of your 100 shares has a premium price of $1. This means that the buyer agrees to pay you $1 per share for the right to buy all 100 shares in 30 days for $50, and you receive $100 immediately.

If the stock reaches the $50 strike price by the end of the 30 days, you must sell your $100 shares for $50 per share. You’ll receive $5,000 for your shares and the $100 premium. On the other hand, if the option expires and the stock doesn’t reach $50, you get to keep your stock and the $100 premium. You can essentially repeat this process until you decide to stop writing covered call options or you have to sell the stock because it meets the criteria of the call option.

Cash-Secured Put Options Strategy

Another way to potentially earn an income using options is with a cash-secured put option. In this scenario, you don’t have to own the stock. Instead, you agree to buy 100 shares of stock for a certain price if it falls to that price within a specified period. In doing so, you receive a premium for each of the shares in the contract. You get to choose the strike price and the expiration date for cash-secured put options. 

If the strike price doesn’t fall to the specified amount, you don’t have to buy the shares, and you get to keep the premium. If the strike price is met and you have to buy the shares, you still retain the premium. Your brokerage account must have the funds to cover the put if you are required to buy the stock shares. Ultimately, you own 100 shares of stock, which you could now put a covered call option on to earn more income.

Example of a Cash-Secured Put Options Strategy

Let’s clarify the cash-secured option strategy with another example. Remember, you don’t have to own shares of stock before you write a cash-secured put option contract, and you collect your premium as soon as you sell the contract.

Say you want to buy a stock, but you’d like to purchase it at a lower price than the current market offers. The price is sitting at $105 per share, but you only want to pay $100. In this situation, you could write a cash-secured put option that obligates you to buy 100 shares if the price per share reaches $100 within 30 days. For taking this option, you receive a premium of $1 for each share, and this premium is paid to you immediately.

If the stock price falls to $100, you will be obligated to buy all 100 shares for $10,000 total. You must have this cash in your brokerage account to cover the purchase before you make the deal. Because you get to keep the $100 premium, you’ll only pay $9,900 for your stock purchase.

Other Options Strategies That Can Generate Income

Although the above-listed options strategies are typically the best types for generating a reliable source of income, there are others that you can use to make money if you understand how they work. These are some of the other options strategies you may consider if you want your investments to generate income:

Long Call

Using a long call options strategy has the potential to see profits soar because the upside on the trade has no cap. You place a long call when you expect a stock price to exceed expectations by the expiry of the contract. The higher the price goes, the more you can earn. However, if the price falls below the strike price, you’ll lose your entire investment. This strategy is best used when you believe a stock price will rise significantly, as a small increase may only cover the premium you paid for the option.

Long Put

Similar to a long call, a long put option applies when you believe the price of a stock will fall by the expiry. If the stock falls below the strike price, the option will expire and you will sell all the shares at the strike price. You must pay a premium to purchase a long put option, and your return could be much higher than the premium you paid. However, because a stock can never go below zero, this type of option has a cap on the amount you receive, unlike long calls.

Short Put

The short put differs from the long put in that you write the contract when you believe the price of a security will go above a specified amount by the time the contract expires, as opposed to writing the options contract if you think the price will drop. You’ll receive a premium upfront for offering to buy shares at the strike price. If the price of the stock goes above the strike price, you’ll have to buy the shares at the agreed-upon price. The most you can earn with this type of option is the premium, but losses can be significant.

Married Put

A married put provides insurance against the stock falling below a certain price. With this options strategy, you choose a stock you own 100 shares of that you believe is going to go up in value and purchase a long put to cover your losses if the price of the stock falls. 

If the stock rises, the long put option will expire worthless and you’ll lose the premium amount, but you’ll gain a profit for every dollar the stock increases. If the stock falls below the strike price, you’ll only lose the premium you pay.

Options strategies can unlock a reliable source of income if you know how they work. As you learn how to build your wealth, you’ll find that using a variety of tools and resources is the best way to gain a better understanding of financial markets. Sign up for our Tax & Asset Protection Workshop if you’d like to learn more about securing your financial future and keeping your assets and investments safe.