Every trader wants to find the Holy Grail when it comes to a strategy for generating income and making money. And while some strategies are far superior to others, there’s a multitude of great ways to help generate income and profits from your trading. One good way is a strategy I call “writing your own ticket.” 

This strategy involves writing both put options and call options. And though the particulars of writing puts differs from writing calls, the overriding goal of increasing your income and wealth is the same. Let’s take a look at how we can make money writing puts, and then we’ll take a look at how to do the same by writing calls.

Writing, or selling, a put option occurs when a trader suspects that the value of the underlying security they own is going to rise. The purchaser of that put option pays a premium to the put writer (or seller) for the right to sell those shares at an agreed upon price if the price of the underlying stock moves lower. If the price goes up, or even if it just remains the same, the put writer (or seller) gets to keep the premium received from the sale.

This strategy allows the put writer to generate income from an existing holding, and if the strategy works, it’s like getting paid to hold a good stock.

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Writing (or selling) covered calls is another great way to generate income from your trading positions. In fact, writing covered calls is one of the most frequently used and “safest” options strategies, because it is one of the most conservative plays a trader can make.

Also known as a “buy-write,” this strategy involves selling call options against stock that you already own. And like selling put options, when you sell call options you immediately collect a premium. Writing covered calls usually occurs in a market environment (or a particular security) that’s relatively stable, and not very volatile. In other words, if you think the value of the underlying stock is either going to be flat or slightly lower, then writing covered calls could a very good way to collect income.

When writing covered calls, two things can happen. The first is that the option can expire worthless, and you get to keep the premium you collected while also keeping the underlying stock. The second is that the price of the underlying stock rises, and the option is exercised. When this takes place, you have to sell your stock. However, you will do so at a higher price than where the stock was when you originally sold the option—plus you get the upside from the up-front premium you collected.

In the latter case, your upside is capped in the position because you have to sell at a predetermined price, so if you’re convinced that the underlying stock you own is going to go up significantly, then writing covered calls on that stock is strategy you’ll want to avoid.

 

 

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