30, Spotify’s revenue was $10.7 billion, a 25% increase year over year.

While the $520 put is 18.8% OTM, the bid price was $12.45 at yesterday’s close, providing a potential annualized return of 37.4% if the put expires worthless. The annualized return is calculated as follows: $1,245 premium (bid price $12.45) / $52,000 (cash secured to buy 100 shares at $520) = 2.4% * 365 / 29 = 37.4%.

If Spotify shares fall below $520 by Dec. 19, you’re required to buy 100 shares at $520, which is why you’ve got to like the company. The worst-case scenario is that you receive $1,245 in premium, own Spotify shares at $520, and your after-tax return is 23.2% based on a 24% federal income tax rate.

Note: As with covered calls, there are circumstances where you’re required to pay regular income tax on gains rather than the long-term rate, even if you hold the stock for more than a year.

Now, we come to the final of the three simplest income-generating options strategies: the Bull Put Spread.

Bull Put Spread

A bull put spread involves selling a put while simultaneously buying a put with a lower strike price but the same expiration date. The goal is to receive premium income while limiting potential losses. 

The risk of a bull put spread is that the stock price falls below the lower strike price at or before expiration, resulting in losses. 

For yesterday’s unusual options activity, I’ve chosen Shopify (SHOP), the e-commerce platform, whose shares have fallen 11% year to date. 

The Dec. 19 expiration $1,350/$1,300 bull put spread involves selling the $1,350 put and buying the $1,300 put. At yesterday’s close, the spread was trading at $18.75. The potential return on risk is 13.8% if the spread expires worthless. 

If Shopify shares fall below $1,350 by Dec. 19, the maximum loss is $56.25 ($1,350 put strike – $1,300 put strike – $18.75 premium received), which is the risk of the trade. 

Under this scenario, you’d have to buy 100 shares at $1,350 and sell them at $1,300, meaning you lose $56.25 on the trade. The maximum profit is $18.75, the premium received, less the loss of $56.25, for a net loss of $37.50.

Assuming the spread expires worthless, your after-tax return is 12.6% based on a 24% federal income tax rate.

That’s all for today. 

I hope you’ve enjoyed this deep dive into the top three income-generating options strategies. 

As always, if you have any questions, feel free to reach out.

Spotify reported a 28% increase in free cash flow to 2.92 billion euros ($3.36 billion) at the end of 2024, showcasing a successful business model with promising future prospects.

Selling a $520 put option with an 11.7% OTM status and a 87% profit probability due to an expected 7.56% move in the next 29 days can yield a decent 0.8% return with an annualized return of 10.1%.

Utilizing a bull put spread strategy can generate income while limiting losses and capping profits for those bullish on a stock like Pfizer, which may have bottomed out in April at its 10-year low of $20.92.

Consider a short $26 put for a bull put spread on Pfizer for a lower potential loss of 17% compared to a $27 put, with a higher profit probability of 49.8% over the $27 put, balancing risk with reward effectively.

Read more at Barchart: 3 Simple Options Strategies to Act on Thursday’s Unusual Activity Now