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:
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You expect the stock to rise significantly in the near future
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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.
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If XYZ rises to $46, your option is $4 ITM.
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Profit = $4 (intrinsic value) – $1.50 (premium) = $2.50 per share (before commissions)
Why It Works in Your Options Learning:
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Risk is limited to the premium paid
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Profit potential is theoretically unlimited
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Great for learning how options respond to stock price changes
2. Buying Put Options – Simple Bearish Strategy
When to Use It:
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You expect the stock to drop sharply
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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.
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If ABC drops to $48, you can profit:
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$52.50 – $48 – $1.25 = $3.25 per share
Why This Belongs in Stock Options Education:
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Teaches risk-defined bearish trading
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Helps you learn timing and price action dynamics
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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:
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You own 100+ shares of a stock
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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:
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You own 100 shares of DEF at $70
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You sell a $75 call expiring in 30 days for $1.00
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You collect $100 in premium
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If DEF stays under $75 → keep the shares + premium
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If DEF closes above $75 → your shares get sold (called away) at $75, locking in gains
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Why This Is a Core Options Trading 101 Strategy:
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Generates consistent income
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Limited risk (you already own the stock)
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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:
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You want to buy a stock at a lower price
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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:
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Stock LMN is $45. You sell a $42.50 put expiring in 3 weeks for $0.90
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You collect $90 in premium
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If LMN stays above $42.50 → keep the premium, no shares bought
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If LMN drops below $42.50 → you’re assigned the stock at $42.50
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Effective buy price = $42.50 – $0.90 = $41.60
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Why It’s a Must-Learn Options Strategy:
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Aligns with long-term investing goals
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Adds income and lowers your cost basis
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Encourages discipline and patience
Options Strategy Comparison: Quick Reference Table
Common Mistakes Beginners Make with Options Strategies
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Ignoring Time Decay: Especially with OTM options, time works against you.
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Overleveraging: Avoid betting big just because the options are cheap.
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No Exit Plan: Always set a profit target and max loss rule.
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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
