Income trading is a great way to generate a profit without doing any guesswork. My favorite Income Trading strategies are:

Short Put

Short Put

Selling a put is one of the basic option trades when building a bullish income strategy.  In its most basic form, one is selling a put against an asset to receive a credit.  This credit is the most that a trader can make, so this is a limited reward strategy. The trade makes money when there is a move higher in the price of the underlying asset.

On the flipside, a downside move in the underlying asset will have adverse effects on the value of the put. Theoretically, the risk is also limited as an underlying asset’s value can only go to zero. Of course, that risk on the downside will increase depending on the strike where one sold at as compared to the final asset price at the expiration or execution date.   

This strategy can be used to generate income or used to buy the underlying asset at a lower price. Let’s say one sells a $40 dollar put on a stock that is currently trading at $50. For our example, we will assume a credit of $100 was received. At expiration, if this stock is below $40, this put will be exercised and one will have to take ownership of this stock at the strike price of $40 per share. Remember though that we received a credit of $100 so our cost of assuming the shares would the $40 per share less the $100 we also received. On the other hand, at expiration, if this stock is above $40 then this put will expire worthless and one will get to keep the $100 premium received when this put was sold.

Short Call

Selling a call is a bearish income strategy that benefits from a move lower in the price of the underlying asset. The seller of a call option receives a credit in exchange for an obligation to deliver stock at a specific price (strike price) by a specific date (expiration date). This strategy can be used to generate income by selling calls against long stock positions.  This is referred to as a covered call strategy.  One could also potentially sell a call against another long call position.  This is referred to as a credit spread, but for now, let’s stick to the covered call strategy.

Let’s say one owns a stock that is currently trading at $50. One can sell a call option with a strike price of $55 and receive a premium for selling this call.  For our example let’s say we received $100 of the premium for selling the call.  If this stock trades under $55 by expiration, one will keep this $100 premium and their shares.  After expiration, one could then can look to sell another call against the long stock position. However, if this stock is trading at $60 by expiration, one will have to sell the long stock position at $55 to close out the short call contract.  Remember though that we received a credit of $100 so our true selling price would be the $55 for the shares and the $100 we will keep as well.  Of course, there is another way to close out the short call position.  If one did not want to lose their long shares, they could easily buy back the covered call at the current market price to avoid having to sell.  The current market price of these call options will be based upon the intrinsic value of the options based upon the strike sold, in conjunction with any remaining time value that still exists.

Credit Spread

A credit spread is an option strategy where one set of options are sold and another set of options is being bought simultaneously. While there are a variety of credit spreads, the two primary types inventors use are the Bull Put spread (BPS) and Bear Call Spread (BCS).

Bull Put spreads are defined where one would sell a put for a specific strike, and then buy a put with a lower strike price.  The net effect would be the seller would receive a credit which represents the difference in the value of the put that was sold compared to the put that was purchased.  This trade makes money when there is a move higher in the price of the underlying asset that the spread is sold against. On the flipside, a downside move in the underlying asset will have adverse effects upon the BPS value.

Bear Call spreads are defined where one would sell a call for a specific strike, and then buy a call with a higher strike price.  The net effect would be the seller would receive a credit which represents the difference in the value of the call that was sold compared to the call that was purchased.  This trade makes money when there is a move lower in the price of the underlying asset that the spread is sold against. On the flipside, an upside move in the underlying asset will have adverse effects upon the BCS value.

In either the Bull or Bear credit spreads the premium in the options that are sold is higher than the premium in the options that are bought, therefore that creates a net credit for this trade. In both methods the trades benefit from a passage of time and as long as the underlying asset trades below short option’s strike price (for the Bear Call spread) and above short option’s strike price (for the Bull Put spread). 

Both credit spreads have a limited risk, we well as a limited reward.  Your risk in either credit spread is the difference between the strikes of the short option from the long option less the credit you initially received.  In turn, your maximum reward is limited to the credit you received we the trade was initially placed.

Iron Condor

An Iron Condor is a combination of a Bull Put spread and a Bear Call spread. Both spreads are being sold in the same expiration cycle simultaneously.  To construct an Iron Condor a trader would sell an Out of The Money Bull Put spread and an Out of The Money bear Calls spread.   To greater the chances of success for the trade, the spreads should be placed for roughly the same credit value and well away from the current strike where the security is trading.   This strategy benefits from the passage of time and as long as the underlying asset stays between short option’s strikes at expiration, this trade makes a profit.

It should be known that Iron Condors are more advanced than the basic credit spreads.  Embedded in each Iron Condor is a series of potential adjustments or corrective actions that could be used when an underlying equity price moves against the trade in one way or another.  The positive aspect of this trade is that the initial credit received can be used to make the necessary adjustments.  The maximum reward for this trade is limited to the credit received for each of the credit spreads less any dollar amount that might have been used to make corrective actions.  In turn, your maximum risk in this trade is when your equity/asset moves against you and settles above your long option contracts of the credit spread.  In that case, the risk would be the difference between the strikes of the short option from the long option, less the credit you initially received and previously made adjustment costs or credits.

Iron Butterfly

An Iron Butterfly, much like an Iron Condor, is a combination of a Bull Put spread and a Bear Call spread. The one glaring difference is that the Iron Butterfly is constructed with short options having the same strike price.  Another difference is that the short strikes, for both the put and call spreads, are usually closer to the money line of the equity or security.  This trade by itself is a low probability income strategy that offers a much greater reward relative to risk. 

This strategy benefits from the passage of time and as long as the underlying asset price stays close to the short options strikes at expiration.   High volatility or big price movement in the underlying security is detrimental to this strategy.  It should be known Iron Butterflies are more advanced than the basic credit spreads.  These types of trades are often employed as part of a much larger strategy and don’t often stand by themselves.

The maximum reward for this trade is limited to the credit received for each of the credit spreads.  In turn, your maximum risk in this trade is when your equity/asset moves against you and settles above your long option contracts of the credit spread.  In that case, the risk would be the difference between the strikes of the short option from the long option, less the credit you initially received. 

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