Options trading is often associated with higher risk, but it’s also true that when used properly, options can be a great tool for generating income. Option chain strategies can provide consistent returns without exposing traders to undue risks.
In this article, we’ll be discussing some option-chain strategies that traders can use to generate income.
One of the most popular option chain strategies is the covered call. A covered call is a strategy where a trader buys a stock and simultaneously sells a call option on the stock. The trader will receive a premium from the call option sale, which helps to offset the cost of the stock. If the stock remains at or below the strike price of the call option, the trader will be able to keep the premium payment as income. If the stock rises above the strike price of the call option, the trader may need to sell their shares at the strike price, which potentially results in both the premium income and any capital gains.
The iron condor is a more complex option chain strategy that’s ideal for generating income in a range-bound market. This strategy consists of a combination of two credit spreads, one bear call spread and one bull put spread. With an iron condor, traders will sell two options with a strike price that’s higher than the current market price and two options with a strike price that’s lower than the current market price. The trader will earn a credit for each of the four options sold, which is their main source of income. If the stock remains within the range defined by the two options, the trader will keep the credit as income. However, if the stock breaks out of the range, the trader may experience a loss if they’re not able to adjust their positions accordingly.
The butterfly spread is another strategy option chain traders can use to generate income. This strategy involves the sale of two call options and two put options simultaneously, at different strike prices, with the same expiration date. The particular strike prices chosen should be equidistant from the stock’s current price. If the stock remains close to the middle strike, the trader will collect income as the options expire, saving them the cost of purchasing the options. However, if the stock moves too far away from the middle strike price, the trader may encounter a loss.
Finally, naked puts is an option chain strategy that traders can use to generate income. With this strategy, traders will sell put options on a stock they don’t currently own with the expectation that the stock price will remain above the strike price of the put option. If the stock stays above the put option strike price, the trader will keep the premium as income. If the stock falls below the strike price of the put option, the trader may be obligated to purchase the stock at the strike price, which can lead to potential losses if the stock continues to fall.