Option Income Strategies

Introduction/Overview

For every net purchaser of options trafficking in net debit spreads and hoping to make a killing, there's a net seller of options trafficking in net credit spreads and hoping to run a profitable and lucrative cash flow business.

Even though the option gambler or speculator and the option income trader frequently stand on opposite sides of the same trade, they do share some common characteristics. Both have short-term time horizons. Both have little if any interest in actual stock ownership (if they do own stock, it's most likely incidental to their option trading strategy). And they've both made the same personal calculation--although each came up with a different answer.

For the options gambler or speculator, a fewer number of successful trades but with potentially huge profits is a winning strategy. For the income trader, a high percentage of smaller gains with the risk of an occasional big loss is the equation for option trading success.

Selling vs. Buying

This may seem a simplification, but as I alluded to in the Gambling/Speculation Overview, the net buyer of options is more likely to possess a tactical-oriented personality while the net seller of options is more likely to possess a strategic-oriented personality.

So the distinctions between these two different categories of option trading strategies is not primarily about risk. A tactical risk may be no more dangerous than a strategic risk, and both may be enough to wreak havoc with the contents of your brokerage account.

As I've said repeatedly through the pages of this site, any option trading strategy can be made more risky or less risky. That's certainly true with option income strategies as well.

Risk

How conservative or aggressive you choose to be with these income strategies, for instance, is largely a question of ambition as much as it is a question of personality. The owner of a rental duplex arguably has the same mindset as that of a hotel mogul. But remember, the Hilton Empire wasn't constructed in a single generation. If you're attempting to build something to rival the Hilton Empire in your own lifetime, you're going to have to take some significant risks.

As I've mentioned elsewhere, option trading is essentially the buying, selling, and trading of risk. But risk is also linked to time itself. The more time you have in which to reach your goals, the less risk you need to take in order to achieve them. And likewise, the less time you have in which to reach your goals, the more risk you'll need to take.

The dynamic between risk and time is never illustrated so well as it is with option income strategies. Because, in addition to risk, what the net credit option trader is primarily selling is time value itself. Selling time. What a heady commodity in which to traffic. No wonder the strategically-oriented are so drawn to option income strategies.

The Option Income Strategies: