By playing options, a trader can generate income on stocks already in his portfolio. One of the most common ways to do this is to sell a call on a stock the trader already owns.

A shareholder can opt to write a covered call on one of the stocks in his portfolio, receiving an instant premium from the transaction. A stock owner might choose to write an out-of-the-money call on a range-bound stock in order to profit from the equity's technical stagnation. In other words, the trader can generate cash from a stock that's not doing much on the charts by writing a call that he ultimately hopes will expire worthless. However, should the stock actually rise, the trader must be comfortable with the selling price upon which he's agreed to sell the shares.

Conversely, the trader can sell a covered call on a stock he's willing to have "called" away, by selecting a strike price which corresponds to his desired selling point. In other words, the shareholder may have already seen nice gains on his stock, and is willing to sell -- if the price is right. Should the stock travel above and beyond the strike price, then the trader is able to sell his shares for his chosen price. However, even if the stock fails to rally above the strike price, the shareholder still profits from the covered call, retaining the premium he received at initiation.

The successful covered call writer pinpoints a stock in his portfolio based on his expectations and objectives. While this can ultimately prove to be a very profitable strategy, the trader must always be willing to have his shares called away, in the event that the stock moves unexpectedly.

The covered call is just one of the many strategies that put money in your pocket at the initiation of a trade: Credit spreads and similar strategies also can generate income, and you can read about them throughout the education portion of this website.