Learn Basic Options Strategies: Covered Calls, Cash-Secured Puts & Buying Options with Confidence
Welcome to the third installment in your stock options education journey. In this article, we explore basic options strategies that are essential to building a strong foundation in options trading. If you're serious about learning options and progressing beyond theory, this is where it starts to get practical.
Whether your goal is to generate income, gain leveraged exposure, or prepare to own stocks at a discount, these options trading 101 strategies are time-tested and beginner-friendly.
1. Buying Call Options – Simple Directional Bullish Strategy
When to Use It:
You expect the stock to rise significantly in the near future
You want leveraged exposure without buying shares outright
Example:
Stock XYZ is trading at $40. You buy a $42 call option expiring in 30 days for a premium of $1.50.
If XYZ rises to $46, your option is $4 ITM.
Profit = $4 (intrinsic value) – $1.50 (premium) = $2.50 per share (before commissions)
Why It Works in Your Options Learning:
Risk is limited to the premium paid
Profit potential is theoretically unlimited
Great for learning how options respond to stock price changes
2. Buying Put Options – Simple Bearish Strategy
When to Use It:
You expect the stock to drop sharply
You want downside exposure without shorting shares
Example:
Stock ABC trades at $55. You buy a $52.50 put option expiring in 2 weeks for $1.25.
If ABC drops to $48, you can profit:
$52.50 – $48 – $1.25 = $3.25 per share
Why This Belongs in Stock Options Education:
Teaches risk-defined bearish trading
Helps you learn timing and price action dynamics
Useful for protecting long stock positions (more on that in advanced lessons)
3. Covered Calls – Generate Income from Stocks You Already Own
When to Use It:
You own 100+ shares of a stock
You want to earn income during sideways or slow upward movement
Strategy Overview:
Sell a call option against your existing shares. You receive a premium, and if the stock stays under the strike price, you keep the shares and the premium.
Example:
You own 100 shares of DEF at $70
You sell a $75 call expiring in 30 days for $1.00
You collect $100 in premium
If DEF stays under $75 → keep the shares + premium
If DEF closes above $75 → your shares get sold (called away) at $75, locking in gains
Why This Is a Core Options Trading 101 Strategy:
Generates consistent income
Limited risk (you already own the stock)
Ideal for learning risk-reward trade-offs in options
4. Cash-Secured Puts – Get Paid to Potentially Buy Stock at a Discount
When to Use It:
You want to buy a stock at a lower price
You’re willing to own the stock if it falls to your preferred price level
Strategy Overview:
Sell a put option and set aside enough cash to buy the shares if assigned.
Example:
Stock LMN is $45. You sell a $42.50 put expiring in 3 weeks for $0.90
You collect $90 in premium
If LMN stays above $42.50 → keep the premium, no shares bought
If LMN drops below $42.50 → you're assigned the stock at $42.50
Effective buy price = $42.50 – $0.90 = $41.60
Why It’s a Must-Learn Options Strategy:
Aligns with long-term investing goals
Adds income and lowers your cost basis
Encourages discipline and patience
Options Strategy Comparison: Quick Reference Table
| Strategy | Market Outlook | Max Risk | Max Reward | Best For |
|---|---|---|---|---|
| Buy Call | Bullish | Premium paid | Unlimited | Growth speculation |
| Buy Put | Bearish | Premium paid | Large but capped | Hedging/short bias |
| Covered Call | Neutral/Bullish | Missed upside | Limited to strike+premium | Income generation |
| Cash-Secured Put | Bullish/Neutral | Stock assignment | Premium + potential gains | Stock accumulation |
Common Mistakes Beginners Make with Options Strategies
Ignoring Time Decay: Especially with OTM options, time works against you.
Overleveraging: Avoid betting big just because the options are cheap.
No Exit Plan: Always set a profit target and max loss rule.
Not Accounting for Assignment Risk: Especially when selling options near expiration.
Wrapping Up Your First Strategy Lesson in Stock Options Education
These four foundational strategies are the core of options trading 101. Mastering them will give you confidence, help you manage risk, and open the door to more advanced setups later on.
As you continue learning options, remember: consistency beats complexity. Stick to defined-risk trades, understand the purpose of each strategy, and always trade with a plan.
Coming up in Learn Options Series, we’ll explore option Greeks—the hidden metrics that influence option price behavior and help you make smarter decisions.
Until then, continue your stock options education with us at ForexLive.com (to evolve to investingLive.comlater this year) — your trusted source for actionable investing.
