Income strategies
In this chapter: Cash-secured puts and covered calls · Calendar and diagonal spreads
Income strategies sell options to collect premium, with defined risk. Cash-secured put: cash on hand + sell put — if assigned, you buy the stock at the strike (a price you wanted anyway); if not, you keep premium. Covered call: own stock + sell call — collect premium; if assigned, you sell at the strike (a price you were happy to sell at). Calendar spread: same strike, different expiries — profit from time decay differential.
Cash-secured put: own ₹1L cash; sell ₹95 put on a stock at ₹100, collect ₹2 premium (annualised yield ~24% on the cash). If stock above ₹95 at expiry, keep ₹2 (~2% on cash for one month). If below ₹95, you buy at ₹95 (₹93 effective with premium credit), and you wanted to own anyway. Covered call: own stock at ₹100; sell ₹110 call for ₹2. If stock stays under ₹110, keep ₹2. If above, sell at ₹110 + ₹2 = ₹112 effective (you would have sold higher in pure long, but locked profit). Calendar: sell front-week ₹100 call (high theta), buy next-month ₹100 call (lower theta). Profit if stock stays near ₹100.
A practitioner insight: rolling positions. When a sold option is about to expire OTM, consider "rolling" — buy back the expiring option (cheap), sell a new option further out (collect more premium). This converts a one-time premium to an ongoing income stream. Risk: rolling losers can compound losses; have rules for when to take a loss vs continue rolling. Indian taxation: option income is treated as business income or speculative income depending on activity level — consult a CA. Most retail option-sellers underestimate the operational complexity (margin calls during sharp moves, assignment risk, settlement) and end up worse than advertised.