You don't need to be a professional trader to use options. Image source: Getty Images.

Whether you're a bull, bear, or you have a neutral outlook happening the stock marketplace, there are ways to put the powerfulness of options to crop for you. And, you preceptor't need to be an investment brain to do it. Here are two basic strategies that you dismiss use to generate income, protect your Washington, and benefit from volatility.

Covered calls can generate income and limit your losses

Selling covered calls is perhaps the most basic options strategy there is. Essentially, you are selling soul else the right to purchase stock from you for a certain price at any time earlier a specified date.

The best room to describe this is through with an example. Have's enjoin that I have 100 shares of ExxonMobil, which is trading for about $85 as I write this, and I Don't foresee any massive price swings in the near rising. I could betray one call (remember, for each one option contract is for 100 shares) expiring on the third Friday in January 2022 with a smash price of $90. In return, I get a premium of $140, which I buzz off to keep.

There are a some different ways that this trade could play out:

1. ExxonMobil could drop, and be below $85 per share in Jan. This would be downtrodden, but remember that you received a premium of $140 ($1.40 per share) for selling the option. You get to keep that income which helps to lessen your loss, the option expires otiose, and you get to repeat the process.

2. ExxonMobil could ascension slightly, but stay below $90 through January. This would beryllium the best-lawsuit scenario. Non only would you be sitting on a nice gain with the stock, just you get the premium from merchandising the option added to your gains. And, you are free to sell another option on your well-worn.

3. ExxonMobil could have an excellent fourth twenty-five percent and be supra $90 at expiration. In this case, your shares would be "called away," meaning you'd be strained to trade them for $90 apiece, no substance how high they climbed. This would produce a nice increase -- a $5 rise in damage plus a $1.40 options premium translates to a 7.5% return in just four months. The gamble, however, is missing come out of the closet on gains if the stock price goes through the roof. Even out if the stock rosebush to say, $125, you'd be forced to sell for $90.

4. The stock price doesn't move the least bit -- it expires at the same price as it was when you sold-out the covered call. From an income standpoint, this is a good issue. The option you sold expires worthless, and since you nonmoving own the stock, you're free to repeat the process.

In a nutshell, a clothed call allows you to generate about income and provides some degree of downside protection, in exchange for giving up some of your potential for share damage gains.

In-the-money calls as a stock replacement

Option prices undergo two components -- intrinsic value and sentence value. Intrinsic respect is the amount of money that an options contract would beryllium meriting if it expired right at once. For example, a contract with a $10 strike Leontyne Price to buy a stock trading for $15 would have an intrinsic valuate of $5. Time measure is the premium you invite what could happen before expiration. If that options condense was trading for $6, $5 would exist intrinsic esteem and the other $1 would be time value.

As your options get deeper in the money, the time prize fades away and intrinsic value makes up most of the option price. Therefore, you assume't have to pay a time agio to buy a deep-in-the-money pick, and information technology can make up ill-used in place of owning a stock.

Let's say that I desire to buy shares of Amazon.com, simply I don't want to place impermissible the $77,000 it would be to buy 100 shares. Instead, I could corrupt a call option expiring in January 2022 with a strike Leontyne Price of $400 for a premium of $380. Only about $10 (2.6%) of this is made functioning of time value, and you'll benefit from price increases of 100 shares of Amazon.com stock for $38,000, about one-half the damage of purchasing the shares straight-out. In a sense, this is like purchasing shares on margin, but you don't have to pay margin interest, which is generally far more than the value you'll pay.

The risk in doing this is if Amazon were to fall infra $400 ahead 2022, you could miss your entire investment. As unlikely as it is, information technology's certainly possible. Using options as caudex permutation for sure has its perks, but at the cost of Sir Thomas More risk.

Start off conservative

As a final thought, IT is admittedly very promiscuous to turn a loss money in options if you wear't know what you're doing. Therefore, it's important to first out slow. Maybe buy one deep-in-the-money call happening a stock you'd the like to own, and then use information technology to observe the pricing dynamics of options and fetch a good feel for how a trade suchlike this plays out over time. OR, maybe deal out a far unconscious-of-the-money covered turn one of your current holdings. It won't generate a ton of income, but the point is to learn.

The bottom line is that you tail end read about options until your eyes cross, but there's atomic number 102 substitute for real-world experience. So, if you do decide to add options to your investment toolkit, information technology's great to do so slowly.