Before diving into option strategy, highly encourage y'all to build a good solid basic understanding of what the Greeks are. They are known as delta, gamma, theta, and vega. These Greeks provide a way to measure the sensitivity of an option’s price to quantifiable factors. It is extremely risky if you do not understand them well, and likely to burn you badly.

Here are the option strategies that I have been using to generate consistent income every month. I am going to introduce these strategies — covered calls, cash secured puts, and vertical spread. They are the safe option trading strategies that limit your risk and reward. Stock investors have two options — the call and put option. Call options give you the right to buy the stock whereas a put option gives the owner the right to sell.

Options are useful tools for trading and risk management. All it takes is to understand the criteria to execute the option and manage your risk and time to exit. It is also highly recommended to understand these terms — In-the-money (ITM), Out-of-The-Money (OTM), At-the-Money (ATM).

Covered Calls

The covered call is also known as buy-write. A covered call is one of the conservative strategies to increase the returns while offsetting the risk. If you have already owned 100 underlying units of shares, you have no issue selling it as long as the stock price is higher than what you initially bought.

For example, you bought XYZ stock at $200 per share, and you can sell it at $205 per share. In this case, you want to sell covered calls with a higher strike price (OTM covered calls). Selling covered calls gives you a premium while taking the underlying shares as collateral. When the financial asset stays below the strike price by the options expiration date, the option won’t be exercised and you get to pocket the premium.

Cash Secured Puts

There are a lot of investors selling covered calls on long-term investments and many say that it is a wasted income opportunity if you don’t. There is however a big problem with selling covered calls on stocks that you are highly bullish on, which is important to keep in mind.

Therefore, the investor collects the premium by selling cash-secured puts. It involves writing a put option and simultaneously setting the cash aside to buy the financial asset if it gets assigned. Thus, this has to be done on the stock you don’t mind holding for the long term as the maximum loss can be quite substantial when the stock price goes deep-in-the-money.

For example, the current trading price of ABC underlying stock is $100, and you want to acquire it at a lower price, say $95. Instead of placing a buy limit, perform a cash-secured put on that underlying stock to collect the premium while waiting for the price to drop. Should the stock price remains above the strike price at the end of the expiration date, the investor will just miss out on the stock purchase and keep the premium. On the other hand, if the option goes ITM, you are obligated to buy back at $95, which is also something in your favor.

Credit Spread

1. Bull Put Spread (Moderately bullish)

The bull put spread also known as credit put spread. It involves a trader buying a put option on an underlying asset while selling a put option (at higher SP) on the same instrument at the same time. Both of them are placed at two different strike prices.

For example:

• Sell $515 Put on ADBE,
• Buy $510 Put on ADBE

This strategy limits the profits as well as the risks. You have capped the maximum loss, so it will not burn you when things went south.

Maximum gain:

• Premium credited

Maximum loss (limited):

• High strike - Low strike - premium credited

I like placing bull put spread on the financial instruments when they meet the following conditions:

• Large-cap stock (>30B, fundamentally strong)
• Liquid options
• High IV Percentile Rank with 35% and above
• No earning release due
• Has a history of not dropping more than 15% in the past 30 days.

2. Bear Call Spread (Moderately Bearish)

This strategy is also known as a credit call spread. It is completely opposite to the bull put spread. It involves a trader selling a call option on an underlying asset while buying a call option (at higher SP) on the same instrument at the same time. Both of them are placed at two different strike prices. Selling a call at a lower strike price while buying another call option at 1 strike higher. Execute this strategy when the trader expects a short-term price dip on the underlying asset.

For example,

• Sell $750 call on NVDA,
• Buy $755 call on NVDA.

Maximum gain:

• Premium credited

Maximum loss (limited):

• High strike - Low strike - premium credited