When it comes to trading Options, there are two ways to generate profits.

The first way is through growth profits.

That is usually achieved with Long premium Option trading strategies (where you pay a debit for buying the Options).

The other way is through income profits.

And this is usually achieved with Short premium Option trading strategies (where you receive a credit for selling Options).

If you want consistency in your profits, then you want to focus on income-generating Option strategies.

In this guide, I’ll share with you the top 3 Options trading strategies for income generation that is suitable for beginners as well.

## Options Income Strategy #1: Covered Call

The Covered Call is the simplest Option strategy to generate an income.

So what’s a Covered Call?

If you already have some long-term stock investment portfolio, then it’s simply selling a Short Call Option on your existing shares.

But you’d need to have at least 100 shares to sell one Covered Call because each Option contract controls 100 shares.

If you have less than 100 shares and you sold a Covered Call, then you could end up being Short shares if you get assigned on your Covered Call.

For example, if you have 90 shares and you sold one Covered Call, then if you get assigned, you’d be Short 10 shares of the underlying stock.

So it’s important to ensure you always have at least 100 shares for every Covered Call you sell.

The Covered Call is a great way to earn an income on your existing shares because while waiting for them to appreciate in the long term, you can make some money in the meantime.

Here’s an example:

Let’s say you already have 100 shares of Starbucks (Ticker: SBUX) that you bought at $83.59.

Instead of just holding on to SBUX and waiting for it to appreciate over time, you can sell a Covered Call on it to generate some income in the meantime.

In this case, let’s say you sell the Covered Call with a strike price of 88 with 25 DTE (days to expiration) and received a credit of $1.20.

Since each Option contract controls 100 shares, you multiply the credit by 100 and that gives you a total premium of $120.

This $120 is yours to keep regardless if SBUX goes up or down!

Now, you might be wondering, what happens if the stock is above $120 at expiration.

First of all, the $120 would be yours to keep regardless.

So that amount is already considered in your pocket.

Secondly, your shares would be called away at the strike price of 88.

That means you’d have a capital gain of:

($88 – $83.59) x 100 shares = $441

So your total profit would be $441 + $120 = $561!

Now, you might be saying, “But I want to hold on to those shares!”

In that case, what you can do is roll your Covered Call once it gets In-The-Money (ITM).

By rolling, you can increase the duration of your Covered Call, collect more premium, and have a higher strike price as well.

This way you can continue collecting more income each time you roll.

## Option Income Strategy #2: Credit Spreads

Credit Spreads are one of the most popular income-generating Option strategies, and for good reason as well.

And that’s because of a few points:

- You don’t need a huge capital to trade Credit Spreads.
- They are defined-risk strategies, which means they don’t have a theoretically unlimited loss like undefined risk strategies (i.e. Strangle, Short Put, Put Ratio Spread, etc.).
- They have a high win rate.
- You can generate quick profits if you’re right in your direction.

So what exactly are Credit Spreads (aka Short Vertical Spreads)?

Credit Spreads are defined-risk strategies that let you speculate if you either have a bullish or bearish bias on the underlying market.

If you’re bullish, you’d use the Bull Put Spread (aka Short Put Spread).

It consists of a Short Put that’s usually Out-of-The-Money (OTM) and a Long Put that’s further OTM.

The Long Put is in place to cap the max loss on the trade.

So even if the stock goes to zero, the max you can lose is capped to where your Long Put strike is.

Hence, this is considered a safe strategy for beginners to use.

And if you’re bearish, you’d use the Bear Call Spread (aka Short Call Spread).

It consists of a Short Call that’s usually OTM and a Long Call that’s further OTM.

Similarly, the Long Call is in place to cap the max loss on the trade.

So even if the stock shoots to the moon, the max you can lose is capped to where your Long Call strike is.

Hence, this is also considered a safe strategy for beginners to use.

The lure of the Credit Spread is that you can be wrong in your direction and still be profitable.

As an example, let’s say the current price of the underlying stock is $100 and you’re bullish on the stock.

So you sell the 95/90 Bull Put Spread.

But after putting on the trade, the stock went down, and at expiration, it settled at $96.

Although you’re wrong about the direction of the trade, you still end up being profitable!

That’s because the underlying stock is above your Short strike of 95 at expiration.

And as long as it’s above your Short strike at expiration, you will get the full profit on the trade (which is the premium you received for selling the Bull Put Spread).

Similarly, if you sold a Bear Call Spread with the strikes of 105/110, as long as the underlying stock expires below your Short strike of 105, you will be profitable on the trade.

Hence, this is the main reason Credit Spreads are very popular.

## Option Income Strategy #3: Iron Condor

If you’re already liking the Credit Spread, then you’ll love the Iron Condor!

That’s because the Iron Condor is both the Bull Put Spread and Bear Call Spread combined.

In the chart above, you can see that at the bottom you have the Bull Put Spread, and at the top you have the Bear Call Spread.

When you combine the two Credit Spreads, it gives you this zone of profit in the middle.

That means that as long as the market stays inside of the Short strikes at expiration, you will be profitable.

The risk profile of the Iron Condor looks like this:

The Iron Condor is considered a neutral Option trading strategy.

And it’s a great strategy to use when you have no directional bias of the underlying market.

In fact, choosing a direction is one of the hardest things to do in trading.

So instead of choosing a direction, you can go with the Iron Condor where you’re trading the Expected Move.

The Expected Move is a term in Options trading that depicts the one standard deviation move of the underlying market by a certain time frame.

In short, it’s the expected range of an underlying market by a given time frame.

The table above is a study done by the folks at Tastytrade to measure how often the market stays inside of this expected range.

The study compares the theoretical occurrences versus the actual occurrences where the market stays inside the expected range.

As you can see in the table, the theoretical expected occurrence is 68%.

That means that if you’re trading the Expected Move, your win rate should be around 68%.

But in actual fact, your win rate is higher than that from 71% – 85%.

And this means that you will win more often than you should!

The reason for this is that historically, Implied Volatility has often overstated Realized Volatility.

This means to say that the actual move in the underlying market is often smaller than what the mathematical model suggests.

The above images show another study done by the Tastytrade research team.

They measured the Expected Move to the actual Realized Move in the three major Index ETFs (SPY, QQQ & IWM).

And in all three Index ETFs, the Realized Move is smaller than the Expected Move, regardless of the volatility.

So to trade the Iron Condor, all you have to do is place the Short strikes at the Expected Move of the underlying stock.

A simple way would be to choose the 16-delta strikes for both the Short Put and the Short Call.

And then you would either buy the Long Put and Long Call (aka the wings) 5 or 10 points away from the Short strikes.

So for example, if your Short Put has a strike price of 100 and your Short Call has a strike price of 130, then you’d choose the strike price of 95 for the Long Put and the strike price of 135 for your Long Call.

## Conclusion

If you’re just starting out in Options trading, then these three strategies are a great starting point for you to generate an income.

If you already have at least 100 shares of a stock, start by selling the Covered Call.

It’s the easiest way to make some money with your existing assets.

If you don’t have any shares, you can start off with the Iron Condor.

That’s because there’s no need to choose a direction.

Just trade the Expected Move and you’re good in the long run.

And if you do have some directional bias and you’re good at reading charts, then you can place Credit Spreads.

Once you’ve seen some consistency in your results, then you can advance to more consistent income-generating Option Strategies like the Strangle, Short Put, and Put Ratio Spread.

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