Covered call: income on stock you hold
If you already own 100 shares, selling a call against them — a covered call — collects premium in exchange for capping your upside above the strike. If the stock stays below the strike, you keep the shares and the premium, and you can sell another call next month. If it rallies past the strike, you sell your shares at the strike price, premium included — you still profit, just not as much as if you'd held the stock uncapped.
A few practical things worth knowing before you try one:
- Your downside isn't reduced, just the entry cost is. If the stock drops hard, you lose money on the shares the same as if you'd never sold the call — the premium only cushions the fall slightly. A covered call is not a hedge against a crash.
- Assignment can happen before expiry, especially on dividend-paying stocks right before the ex-dividend date, since the call buyer may want to own the shares to collect the dividend. If you're not prepared to sell your shares, watch for this.
- A common move is "rolling": if the stock approaches your strike and you'd rather keep the shares, you buy back the short call (usually at a loss) and sell a new one further out in strike and time. This is normal position management, not a sign you did something wrong.
- Pick a strike based on your actual goal. A strike close to the current price collects more premium but caps you sooner; a strike further out collects less but lets more of a rally come through.
Cash-secured put: getting paid to set a buy price
A cash-secured put flips the idea around: set aside enough cash to buy 100 shares at a strike below today's price, then sell a put at that strike. If the stock stays above the strike, you keep the premium and walk away. If it falls below, you're obligated to buy at the strike — but you were already willing to pay that price, and the premium softens the cost basis.
This only makes sense if you'd genuinely be happy owning the stock at that strike. Selling puts purely for the premium, on a stock you wouldn't actually want to buy, is a common way beginners get into trouble — the premium looks like easy income until you're holding shares you didn't really want, at a price that's since dropped further.
- Your max loss is large in theory: if the stock goes to zero, you still owe the full strike price for shares now worth nothing, offset only by the premium you collected. This is the same economic risk as just buying the stock outright at the strike — selling the put doesn't add extra risk on top of owning the stock, it just changes how you get there.
- "Cash-secured" matters. Without setting aside the cash (or doing it on margin instead), you can end up in a position you can't actually afford to take on if assigned.
- Covered calls and cash-secured puts pair naturally into a cycle some traders call the wheel: sell a put, get assigned the stock if it drops, then sell covered calls against those shares until you're called away, then go back to selling puts. It's a way to systematically collect premium on a stock you're willing to own through any of these outcomes.
Vertical spread: a cheaper, capped bet
A vertical spread buys one option and sells another at a different strike, same expiry. A bull call spread — buy a lower-strike call, sell a higher-strike call — costs less than buying the call alone, because the premium you collect from the short leg offsets the premium you pay for the long leg. The trade-off: your maximum gain is also capped, at the difference between the two strikes, minus what you paid.
- Your max loss is defined and small — it's the net premium you paid, full stop. This is the main appeal over buying a single option outright: you know your worst case in dollar terms before you ever place the trade.
- Strike width is a dial, not a fixed rule. A narrower spread (strikes closer together) costs less and caps your gain sooner; a wider spread costs more but lets more of a move come through. Neither is "correct" — it's a trade-off between cost and ceiling.
- The same structure works in reverse for a bearish bet: buy a higher-strike put, sell a lower-strike put, profiting if the stock falls. The logic mirrors the bull call spread exactly, just flipped.
- Time decay mostly cancels out between the two legs, which is part of why spreads are popular with traders who want defined risk without theta working hard against them the way it does on a single long option.
The common thread
All three strategies trade away unlimited upside (or accept downside risk) in exchange for either income today or a cheaper entry price. None of them are "safe" — they just reshape where the risk sits. Reading the payoff diagram for any strategy before you enter it tells you exactly what you're trading away and what you're getting in return.