Basic Options Strategies: Covered Calls & Spreads

Why strategies beat single-leg bets

A single long call or put is a clean directional bet, but it comes with two costs that are easy to underestimate: you're paying full premium up front, and as covered in implied volatility, that premium can bleed away even when you're right on direction. Combining two or more positions into a single strategy is how traders manage those two costs directly, either by collecting premium from someone else or by capping their own risk on both sides of the trade.

The three strategies below aren't the only ones that exist, but they're the ones almost every other strategy builds on. Once you understand the payoff logic behind each, more complex structures are mostly combinations of these same building blocks.

The covered call: get paid to cap your upside

A covered call means holding the underlying asset and selling a call option against it. You already own the coin; selling the call means you're agreeing to sell it at a set strike price if the buyer exercises, and you collect a premium for taking on that obligation.

Say you hold 10 units of an asset at $100. You sell a call with a $115 strike and collect $3 of premium per unit. If the price stays below $115 through expiration, the call expires worthless, you keep the $3 premium, and you still hold your original position. If the price rises above $115, your units get called away at $115, meaning you still profit on the position up to that strike, plus the premium, but you give up any gains beyond $115.

The trade-off is straightforward: you're generating extra income on a position you already hold, in exchange for capping how much further upside you can capture. It's a strategy for holders who are comfortable selling at a specific price and want to get paid for waiting.

The cash-secured put: get paid to set a buy price

A cash-secured put flips the covered call around. Instead of holding the asset, you hold enough cash to buy it, and you sell a put option obligating you to buy the asset at the strike price if it's exercised against you.

Say an asset trades at $100 and you'd happily buy it at $90. You sell a put with a $90 strike and collect $2.50 of premium per unit, holding $90 per unit in reserve to cover the purchase if needed. If the price stays above $90, the put expires worthless and you keep the premium, having effectively been paid to wait. If the price falls below $90, you're obligated to buy at $90, which is the price you already decided you were happy to pay, with the premium slightly softening your effective cost basis.

This strategy suits traders who already want to buy an asset at a lower price and would rather get paid for the wait than just sit in cash.

Vertical spreads: define your risk on both sides

A vertical spread means buying one option and selling another of the same type and expiration, but at a different strike. The premium collected from the option you sell partially offsets the premium you pay for the one you buy, and in exchange, both your maximum profit and maximum loss are capped from the moment you open the trade.

A bull call spread, for example, means buying a call at a lower strike and selling a call at a higher strike. Buy the $100 call for $6 and sell the $115 call for $2, for a net cost of $4. Your maximum loss is that $4, no matter how far the price falls. Your maximum profit is the $15 gap between strikes minus the $4 you paid, or $11, no matter how far the price rises above $115. You've given up some of the unlimited upside a plain long call would offer, in exchange for a lower entry cost and a hard ceiling on how much you can lose.

The put version, a bear put spread, works the same way in the opposite direction: buying a higher-strike put and selling a lower-strike one to profit from a decline with capped risk on both sides.

Picking a strategy that matches your view

These three strategies answer different questions. If you already hold the asset and want income while you wait, a covered call fits. If you want to buy at a lower price and get paid to wait, a cash-secured put fits. If you have a directional view but want your maximum loss defined up front rather than paying full premium for unlimited upside, a vertical spread fits.

None of these are "safer" than trading spot or perps in some absolute sense. They're structures for expressing a specific view with a specific, known trade-off, rather than an open-ended bet. The strike prices and expiration you choose still need to reflect a real read on where you think the asset is headed and by when, covered in more depth in technical analysis basics.

Mistakes that turn a defined-risk trade into an open-ended one

The most common error with covered calls is selling against a position you're not actually willing to part with. If you'd be upset to have your coin called away at the strike you sold, you sold the wrong strike, or shouldn't have sold a call at all. The strategy only works if you're genuinely fine with either outcome: keeping the premium, or selling at the strike.

With cash-secured puts, the equivalent mistake is selling a put on an asset you wouldn't actually want to own at that price. The premium is small compensation if the price gaps well below your strike and you're now holding a position you didn't really want.

With spreads, the risk is usually mechanical: not closing or managing the position near expiration, letting assignment risk on the short leg create an unintended position, or under-sizing the trade relative to the defined max loss because the strategy "feels safe." A spread caps your risk per contract, but sizing too many contracts removes that safety just as fast as an uncapped position would. The framework in risk management and position sizing still applies in full, regardless of how the individual trade is structured.