Options Income Strategies
Educational guides to covered calls, cash-secured puts, collars, and credit spreads.
Premium received is not free income
Strategies that collect option premium exchange one risk profile for another. A covered call can cap upside while leaving substantial stock downside. A cash-secured put can lead to share assignment during a decline. Credit spreads have limited reward and can lose several times the credit received.
Study the complete payoff, capital requirement, assignment mechanics, and tax considerations—not just the premium.
Bear Call Spread
Selling a lower-strike call and buying a higher-strike call to receive credit while defining upside risk.
- Maximum riskStrike width minus credit
- Maximum rewardCredit received
Bear Put Spread
Buying a higher-strike put and selling a lower-strike put with the same expiration to define bearish risk and cap reward.
- Maximum riskNet debit paid
- Maximum rewardStrike width minus net debit
Bull Call Spread
Buying a call and selling a higher-strike call with the same expiration to create defined bullish risk and capped reward.
- Maximum riskNet debit paid
- Maximum rewardStrike width minus net debit
Bull Put Spread
Selling a higher-strike put and buying a lower-strike put to receive credit while defining downside risk.
- Maximum riskStrike width minus credit
- Maximum rewardCredit received
Calendar Spread
Selling a nearer-dated option and buying a farther-dated option at the same strike to create time- and volatility-dependent exposure.
- Maximum riskNet debit, generally
- Maximum rewardVariable and not fixed at entry
Cash-Secured Put
Selling a put while maintaining enough cash to buy the shares if assigned.
- Maximum riskStrike price minus premium if underlying falls to zero
- Maximum rewardPremium received
Covered Call
Holding shares while selling a call against those shares, receiving premium in exchange for accepting an obligation to sell at the strike.
- Maximum riskSubstantial stock downside minus premium received
- Maximum rewardLimited to call strike appreciation plus premium
Diagonal Spread
Using different strikes and expirations, commonly buying a longer-dated option and selling a shorter-dated option.
- Maximum riskNet debit and assignment-related exposure
- Maximum rewardVariable
Iron Butterfly
Combining a short call and put at the same strike with protective wings to define risk and collect credit.
- Maximum riskWing width minus credit
- Maximum rewardNet credit received
Iron Condor
Combining a bull put spread and bear call spread to collect credit within a defined range.
- Maximum riskLarger wing width minus credit, adjusted for asymmetry
- Maximum rewardNet credit received
Long Call
Buying a call for the right—but not the obligation—to buy the underlying at the strike price during the contract term.
- Maximum riskPremium paid
- Maximum rewardTheoretically unlimited
Long Put
Buying a put for the right—but not the obligation—to sell the underlying at the strike price during the contract term.
- Maximum riskPremium paid
- Maximum rewardSubstantial but limited by underlying reaching zero
Long Straddle
Buying a call and put at the same strike and expiration to seek a large move in either direction.
- Maximum riskTotal premium paid
- Maximum rewardUnlimited upside; substantial downside payoff toward zero
Long Strangle
Buying an out-of-the-money call and out-of-the-money put with the same expiration to seek a large move.
- Maximum riskTotal premium paid
- Maximum rewardUnlimited upside; substantial downside payoff toward zero
Poor Man’s Covered Call
A call diagonal often built with a deep-in-the-money longer-dated call and repeated shorter-dated short calls.
- Maximum riskNet debit and complex assignment/exposure risk
- Maximum rewardVariable and capped during each short-call cycle
Protective Collar
Owning shares, buying a protective put, and selling a call to offset some or all of the put cost while capping upside.
- Maximum riskDefined range below stock price, plus net premium
- Maximum rewardLimited by short-call strike
Protective Put
Owning shares and buying a put to establish a potential downside floor for a limited period.
- Maximum riskStock decline to put strike plus put premium and basis considerations
- Maximum rewardStock upside minus put cost
Short Straddle
Selling a call and put at the same strike and expiration to collect premium while accepting substantial two-sided risk.
- Maximum riskUnlimited upside and substantial downside
- Maximum rewardTotal credit received
Short Strangle
Selling an out-of-the-money call and put to collect premium while accepting substantial tail risk.
- Maximum riskUnlimited upside and substantial downside
- Maximum rewardTotal credit received
Wheel Strategy
A sequence commonly described as selling cash-secured puts, accepting assignment, then selling covered calls.
- Maximum riskSubstantial equity downside
- Maximum rewardPremium plus limited stock appreciation depending on stage