How to Trade Options for Income with a Small Account

Covered calls and naked puts are two of the most popular options strategies for generating income. But for traders with smaller accounts, that can pose a problem.

The risk of assignment means options sellers can be on the hook to buy a large amount of stock if those sold options go in the money prior to expiration – which requires levels of capital that smaller accounts don’t always have.

So how do small accounts tap into these income-generating strategies? According to options strategist Rick Orford, the answer is using risk-defined credit spreads.

Selling options can be powerful, but it comes with an important mindset shift — especially when selling puts.

When you sell a put, you’re agreeing in advance to buy the stock if assigned. There’s no confirmation popup, and no second chance to confirm you’re really sure. Assignment is automatic.

That’s fine if you have the capital and actually want to own the stock. But for many traders with smaller accounts, strategies like covered calls and naked puts simply aren’t practical for purposes of pure income generation, because they carry the potential obligation of buying or securing 100 shares. Depending on the stock, that can be a capital-intensive commitment.

This is where credit spreads come in.

Spreads allow traders to generate income and benefit from high implied volatility (IV) environments – without massive capital requirements, and with defined risk.

Instead of selling a single option, a spread pairs two options together. That structure:

In market environments when IV is elevated and price swings can be violent, that protection matters.

Rick focuses on two of the most common and beginner-friendly credit spreads:

This strategy is used when you believe the stock will stay below a certain level, making it neutral-to-bearish in nature.

You sell a call option at a strike to coincide with this expected price resistance, and buy another call at a higher strike with the same expiration.

The goal is simple: the stock finishes at or below the sold call strike at expiration, and you keep the premium as your maximum profit.

This trade works in the opposite direction, and is often favored when traders want bullish exposure without buying shares.

You sell a put option at a strike price to coincide with expected chart support, and buy another put at a lower strike. As long as the stock stays at or above the sold put at expiration, the trade wins.

Both of these strategies benefit from elevated IV environments, and both limit risk if the stock price moves against you.

Rick also points out that the same framework applies beyond simple credit spreads. Once traders understand how defined-risk structures work, they can expand into:

• Iron condors

• Butterflies

• Straddles and strangles

All of these trades can be analyzed, filtered, and tested using Barchart’s options screeners and profit/loss charts.

Small accounts don’t need to sit out income-generating strategies, but they do need structure.

By using spreads instead of naked option selling, traders can:

This clip is a must-watch if you want to trade options for income without blowing up your account:

On the date of publication, Barchart Insights did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com