With income strategy we can generate profit on regular basis, buy combining buy or sell. This strategy is done by selling option either by selling calls or selling puts, and buying another option to protect the other option. This strategy is usually short-term strategy. The longer the time, the riskier it is. When we are writing option, the longer the time, the higher the probalility for the option to go against us. You can also collect income when the underlying (stock) does not move at all. There are numerous income strategy like:

• Covered call
• Vertical spread
• Horizontal spread
• Diagonal spread
• Calender spread

The Covered Call is the most basic of income strategies, but it is very effective and can also be used by experts. From the name we knew that it use the call option which is protected by something. First sell the call option. This way we can earn our income. If the option go down, then you are ok. But if the stock go up, you must be ready for the call option to be excercised. To protect your income, you must have the underlying or stock. So that, when the stock go up, you can offset the loss from the option with the stock.
You can sell In The Money or At The Money call at higher price than Out of The Money. But it is safer if you sell Out of The Money call, lower possibility of delivering the stock at the strike price of the sold call. So sell call option one or two strikes price higher than the stock. If the stock is purchased simultaneously with writing the call contract, the strategy is commonly referred to as a “buy-write”.
By using this strategy, you can own the stock and having regular income from selling call option.

Using an option spread involves combining two different option. There are various kind of spread:

• Vertical spread, buy and sell option with different strike price, same expiration date
• Horizontal spread, buy and sell option with same strike price, but different expiration date
• Diagonal spread, buy and sell option with different strike price, and different expiration date

With vertical spread, you can buy Out of The Money (OTM) call, sell further OTM call (bull call spread) or buy OTM put, sell further OTM put (bear put spread). With bull call spread, you counter the long call by the short option reward. This will bring down you cost on the trade than only buying the call option. Futher OTM call is cheaper than OTM call.
For example, ABC is trading at $26.5 on February 20, 2008. Buy the January 2009 $27.00 strike call for $1.40, and sell then January 2009 further OTM at $32.5 strike call for $0.25.

• You only need to pay $1.15, because you receive $0.25 from selling the option, to buy the $1.40 option. ($1.40-$0.25 = $1.15)
• When the stock fall, your maximum loss is the premium you paid for the position that is $1.15
• You get your maximum reward when the stock reaches the further OTM strike price, which is $32.5, because you need to exercise the option you sell. So maximum profit is the difference of strike price
• Premium paid = $5 - $1.15 = $3.85.
• You will reach your breakeven, at lower strike price + premium paid = $27.5 + $1.15 = $28.65

Tags: calender spread, call option, Covered Call, Diagonal spread, Horizontal spread, income strategy, option spread, OTM, Out of The Money, premium, Vertical spread