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Article
What are options, and how can they generate income?
6 February 2026
Key takeaways
A right, not an obligation
Options give the buyer the right to buy or sell a particular asset at a fixed price by a certain date.
Income strategies
An equity strategy using options may be able to effectively generate steady income while maintaining exposure to stocks.
Strategic tools
From flexibility to risk management, options offer a range of potential benefits for an investment portfolio, but they’re also far from risk-free, especially for inexperienced investors.
Options are versatile financial instruments that can be used to generate income, manage risk, and enhance investment returns. Understanding how options work and their potential benefits and risks is crucial for any investor looking to incorporate them into their portfolio.
Most investors who know anything about options probably think about them from the perspective of the buyer. If you think the price of an asset will go up, you could buy a call option that gives you the right to buy that asset at a certain price in the future. If you expect the asset to fall, you could buy a put option that gives you the right to sell it at a certain price.
Hedge funds and other professional investment managers, however, can use options in another way. They will often sell the options as part of their strategy, using the premium (the price of the option) to produce a potentially greater return. If the asset doesn’t reach the strike price by the expiration date, the option becomes worthless, and the seller pockets the entire premium.
What are options?
An option is a contract between two parties for the right to trade a specified asset at a specified price on or before a specified date. The underlying asset can be a commodity, an individual stock, a bond, an index, or anything else that can be standardised.
Many options are settled in cash. For instance, the buyer of a call option on the S&P 500 index will receive a cash settlement if the buyer exercises the option. The seller of a call option will have to pay the cash settlement if the buyer exercises the option.
For clarification, an option contract isn’t between two specific individuals. Options are traded on an exchange, where buy and sell orders are matched automatically. The administration of the contract is handled by a clearing house, which deals with each individual directly. Clearing houses keep track of the contract positions (who holds what) and margin requirements.
Transcript
This marketing communication is for Professional investors and Qualified clients/sophisticated investors. Investors should read the legal documents prior to investing.
Head of Thematic & Specialist Product Strategy
Product Strategy & Development
What are options?
(On screen “Investing in options involves risks and may not be suitable for all investors.”)
More investors are adding options to their portfolios because they can be useful tools for generating income, reducing downside risk and other potential benefits.
Buyers and sellers of options have the potential to profit if certain market conditions are met.
So how does this work?
A call option (Title and first bullet come on screen) gives the holder the right to buy an asset, such as a stock, at a certain price, called the strike price.
Buyers pay a premium for call options because they believe the asset will surpass the strike price by a certain date.
If it does, (second bullet comes on screen) the buyer would profit by purchasing the asset at the lower strike price and selling it at the higher market price.
(third bullet comes on screen) If the asset doesn’t reach the strike price, the seller of the option profits from the premium paid by the buyer.
Let’s say there’s a stock that’s currently trading at $50.
The buyer purchases a call option with a strike price of $55.
If the stock’s price rises to $60 before the option expires, the buyer can purchase the stock at the $55 strike price and then sell it at the $60 market price for a profit.
But if the stock’s price doesn’t go over the $55 strike price, the seller of the option profits by keeping the premium paid by the buyer.
A put option (Title and first bullet come on screen) gives the holder the right to sell an asset at the strike price.
Buyers pay a premium for put options because they believe the asset will fall below the strike price by a certain date.
If it does, (second bullet comes on screen) the buyer would profit by purchasing the asset at the lower market price and selling it at the higher strike price.
(third bullet comes on screen) If the asset doesn’t fall below the strike price, the seller of the option profits from the premium paid by the buyer.
Let’s say there’s a stock that’s currently trading at $50.
The buyer purchases a put option with a strike price of $45.
If the stock’s price falls to $40 before the option expires, the buyer can purchase the stock at the market price of $40 and then sell it at the $45 strike price for a profit.
But if the stock’s price doesn’t go below the strike price of $45, the seller of the option profits by keeping the premium paid by the buyer.
You don’t have to do all of this yourself. Access to professionally managed options-based strategies has never been easier thanks to exchange-traded products such as Invesco’s Income Advantage Strategies.
Investment Risks
The value of investments, and any income from them, will fluctuate. This may partly be the result of changes in exchange rates. Investors may not get back the full amount invested. Options or options on futures contracts are subject to correlation risk because there may be an imperfect correlation between the options and the securities or contract markets that cause a given transaction to fail to achieve its objectives. Exchanges can limit the number of positions that can be held or controlled by the Investment Manager, thus limiting the ability to implement strategies. Options are also subject to leverage risk and can be subject to liquidity risk.
Important Information
This marketing communication is exclusively for use by professional investors in Continental Europe as defined below, Qualified Clients/Sophisticated Investors in Israel and Professional Clients in Ireland and the UK.
For the distribution of this communication, Continental Europe is defined as Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden and Switzerland.
Data as at March 2025, unless otherwise stated.
By accepting this material, you consent to communicate with us in English, unless you inform us otherwise. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Views and opinions are based on current market conditions and are subject to change.
Issued by Invesco Investment Management Limited, Ground Floor, 2 Cumberland Place, Fenian Street, Dublin 2, Ireland, regulated by the Central Bank of Ireland.
Switzerland: Issued by Invesco Asset Management (Schweiz) AG, Talacker 34, 8001 Zurich, Switzerland.
EMEA4262085/2025
What is margin?
When someone buys an option, the most they can ever lose is the premium paid for the option itself. That’s the maximum risk for that one option, and that’s the most the clearing house would ever ask for the buyer to deposit with them.
For the seller of an option, the most they can ever profit is the premium received. The potential for loss is much greater and, in theory, can even be unlimited in some cases. Clearing houses require the seller of options to maintain a certain level of margin with them, for protection in case things go wrong. Margin is set by a defined calculation.
A seller of a call option can reduce their risk – and potentially the margin required – by holding the underlying asset. This simple strategy is known as a “covered call”.
A seller of a put option is in a different situation, because holding the underlying asset doesn’t help them. Instead, the put seller could set aside the amount of cash that would be needed to buy the asset if the option is exercised. This is known as a “cash-secured put” strategy.
How do options generate income?
When an investor sells an option, they give the buyer the ability to buy or sell a specific asset by a certain date at a predetermined price. In return, the seller collects an option premium from the buyer. This premium is considered income. Option income strategies can effectively generate steady monthly income while maintaining exposure to stocks. In contrast to bonds, option income is impacted by stock market volatility and strike prices (high stock market volatility can lead to higher option premiums, and vice versa), rather than interest rates or actions from the Federal Reserve.
Transcript
This marketing communication is for Professional investors and Qualified clients/sophisticated investors. Investors should read the legal documents prior to investing.
Head of Thematic & Specialist Product Strategy
Product Strategy & Development
How do options generate income?
(On screen “Investing in options involves risks and may not be suitable for all investors.”)
More investors are adding options to their portfolios as an additional way to generate income.
So how does this work, and how is option income different than income from other investments?
When an investor buys an option, they’re getting the ability to buy or sell a specific asset, like a stock, by a certain date at a certain price, called the strike price.
On the other side of that transaction is the seller of the option. The seller collects a premium from the buyer, which is considered income.
The income generated from options is driven by different forces than income from bonds or dividend-paying stocks.
For example, traditional bond exposures are exposed to interest rate risk. Equity options have the potential to deliver attractive income no matter the rate environment or the actions by the Federal Reserve.
Instead, the yield from selling equity options is impacted by the strike price of the option as well as expectations for equity market volatility.
When equity market volatility is high, option premiums increase and push the yields higher as compensation for the underlying asset's higher expected price variability. Price variability increases the chances that the asset's price could rise above the strike price, in which case the buyer of the option could require the seller to sell the asset and miss out on potential gains.
Option income strategies can be an effective way of generating a steady stream of monthly income while maintaining exposure to equities.
You don’t have to do all of this yourself. Access to professionally managed options-based strategies has never been easier thanks to exchange-traded products such as Invesco’s Income Advantage Strategies.
Investment Risks
The value of investments, and any income from them, will fluctuate. This may partly be the result of changes in exchange rates. Investors may not get back the full amount invested. Options or options on futures contracts are subject to correlation risk because there may be an imperfect correlation between the options and the securities or contract markets that cause a given transaction to fail to achieve its objectives. Exchanges can limit the number of positions that can be held or controlled by the Investment Manager, thus limiting the ability to implement strategies. Options are also subject to leverage risk and can be subject to liquidity risk.
Important Information
This marketing communication is exclusively for use by professional investors in Continental Europe as defined below, Qualified Clients/Sophisticated Investors in Israel and Professional Clients in Ireland and the UK.
For the distribution of this communication, Continental Europe is defined as Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden and Switzerland.
Data as at March 2025, unless otherwise stated.
By accepting this material, you consent to communicate with us in English, unless you inform us otherwise. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Views and opinions are based on current market conditions and are subject to change.
Issued by Invesco Investment Management Limited, Ground Floor, 2 Cumberland Place, Fenian Street, Dublin 2, Ireland, regulated by the Central Bank of Ireland.
Switzerland: Issued by Invesco Asset Management (Schweiz) AG, Talacker 34, 8001 Zurich, Switzerland.
EMEA4262085/2025
What are the benefits of options?
Options can serve a broader purpose in a portfolio. Here are five other potential benefits.
- Leverage: Options let investors control a large position with a relatively small investment. This leverage can amplify potential returns, helping investors benefit from price movements without committing substantial capital.
- Hedging: Investors use options to safeguard against potential losses in their portfolios. Put options, for example, can offset, or hedge, declines in the value of their underlying assets.
- Speculation: Buying call or put options lets investors bet on price movements without owning the underlying asset and potentially reap significant rewards if they’re right.
- Flexibility: Options offer a variety of strategies for different market conditions and investment goals ranging from conservative income generation to aggressive growth.
- Risk management: Options can be used to strategically fine-tune a portfolio’s risk profile, managing exposure to market volatility, interest rate changes, and other types of risk.
What are the risks of options?
Options are far from risk-free, especially for an inexperienced investor. Here are five inherent risks.
- Complexity: Options trading requires a deep understanding of various strategies, market conditions, and pricing models, which can overwhelm inexperienced investors.
- Time decay: Options are time sensitive, and their value diminishes as the expiration date approaches. Even if the underlying asset moves favourably, the option may still lose value if it doesn’t move quickly enough.
- Leverage risk: While leverage can amplify gains, it can also magnify losses. Investors using options to leverage their positions may face significant losses if the market moves against them. Therefore, fully collateralizing or “covering” options may be appropriate for managing leverage risk.
- Liquidity issues: Options on less popular underlying assets may suffer from low liquidity. This can make it difficult for investors to enter or exit positions at desired prices, potentially leading to unfavourable trades.
- Costs and fees: Trading options can involve higher transaction costs and fees than trading other investments, particularly if the underlying stocks are less liquid. Additional costs can reduce potential profits and make frequent trading less viable for investors.
Transcript
This marketing communication is for Professional investors and Qualified clients/sophisticated investors. Investors should read the legal documents prior to investing.
Head of Thematic & Specialist Product Strategy
Product Strategy & Development
How do options help with downside risk?
(On screen “Investing in options involves risks and may not be suitable for all investors.”)
Generating income while limiting downside risk is an appealing prospect for many equity investors. Selling options on a portion of your stock portfolio can help with that objective.
When you sell an option on a stock, you collect a premium from the buyer — which helps offset any potential losses your equity portfolio may experience if stock prices fall. If the stock price falls, the premium you collected can help offset some of the losses in your stock portfolio. This is because the premium acts as a cushion against the decline in stock value.
In exchange for that upfront income and downside risk mitigation, you would have less upside potential in your equity portfolio, since the buyer of the option would have the right to purchase some of your stock if it hits a specified price. If the stock price rises to a certain level (the strike price), the buyer of the option has the right to buy your stock at that price. This means you might miss out on some of the higher profits if the stock price goes up significantly.
If the prospect of generating consistent monthly income, mitigating equity risk, and maintaining equity exposure sounds appealing, there’s no need to manage options on your own. Access to professionally managed options-based strategies has never been easier thanks to exchange-traded products such as Invesco’s Income Advantage Strategies.
Investment Risks
The value of investments, and any income from them, will fluctuate. This may partly be the result of changes in exchange rates. Investors may not get back the full amount invested. Options or options on futures contracts are subject to correlation risk because there may be an imperfect correlation between the options and the securities or contract markets that cause a given transaction to fail to achieve its objectives. Exchanges can limit the number of positions that can be held or controlled by the Investment Manager, thus limiting the ability to implement strategies. Options are also subject to leverage risk and can be subject to liquidity risk.
Important Information
This marketing communication is exclusively for use by professional investors in Continental Europe as defined below, Qualified Clients/Sophisticated Investors in Israel and Professional Clients in Ireland and the UK.
For the distribution of this communication, Continental Europe is defined as Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden and Switzerland.
Data as at March 2025, unless otherwise stated.
By accepting this material, you consent to communicate with us in English, unless you inform us otherwise. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Views and opinions are based on current market conditions and are subject to change.
Issued by Invesco Investment Management Limited, Ground Floor, 2 Cumberland Place, Fenian Street, Dublin 2, Ireland, regulated by the Central Bank of Ireland.
Switzerland: Issued by Invesco Asset Management (Schweiz) AG, Talacker 34, 8001 Zurich, Switzerland. EMEA4262085/2025
How can investors buy and sell options?
Investors who understand options and want to include them in their portfolios can get exposure to them in a variety of ways.
- Trade options themselves: Investors can buy and sell options through online brokers and specialized options trading platforms. They must apply for trading privileges, which may require meeting certain criteria and passing a test.
- Financial professionals: Investors looking for a more hands-off approach can work with a financial professional with expertise in options trading. They can help develop and execute options strategies tailored to the investor’s financial goals and risk tolerance.
- Options-based ETFs: ETFs that use options strategies can provide a diversified and less complicated way to add options to a portfolio. Our Invesco Nasdaq-100 Income Advantage UCITS ETF is managed by professional managers who use options to potentially enhance returns, generate income, and manage risk.
Transcript
This marketing communication is for Professional investors and Qualified clients/sophisticated investors. Investors should read the legal documents prior to investing.
Head of Thematic & Specialist Product Strategy
Product Strategy & Development
What should investors look out for when considering an options income ETF ?
(On screen “Investing in options involves risks and may not be suitable for all investors.”)
Option income ETFs can be an effective way to generate monthly income while maintaining exposure to equities.
But not all option income ETFs are alike. There are significant differences “under the hood” that may drive investor outcomes.
So what should investors look out for when considering an options income ETF? Here are three considerations.
Strike prices
First, many option income managers will allow their yields to fluctuate as market volatility changes. But Invesco Income Advantage ETFs seek to provide investors with a more consistent yield through time by actively adjusting the strike prices as market volatility changes.
Calls and puts
Second, some ETFs sell only calls or only puts. But our ETFs sell both. By combining calls and puts, this helps us balance the market participation and yield trade-off through different market volatility environments.
Equity-linked notes
Third, there are different ways that options can be implemented. Our ETFs use equity-linked notes, or ELNs, which are financial instruments that combine features of stocks and stock options into a single note. They offer the benefits of both equity investments and derivatives like put or call options, and have a number of features that we consider attractive.
Contact your Invesco representative to learn more about how Invesco Income Advantage ETFs can help provide investors with a consistent stream of monthly income while maintaining exposure to equity markets.
Investment Risks
The value of investments, and any income from them, will fluctuate. This may partly be the result of changes in exchange rates. Investors may not get back the full amount invested. Options or options on futures contracts are subject to correlation risk because there may be an imperfect correlation between the options and the securities or contract markets that cause a given transaction to fail to achieve its objectives. Exchanges can limit the number of positions that can be held or controlled by the Investment Manager, thus limiting the ability to implement strategies. Options are also subject to leverage risk and can be subject to liquidity risk. Investments in ELNs are susceptible to the risks of their underlying instruments, which could include management risk and market risk. ELNs are also subject to certain debt securities risks, such as interest rate and credit risks. An ELN investment is also subject to counterparty risk, which is the risk that the issuer of the ELN will default or become bankrupt and may not repay the principal amount of, or income from, the investment. ELNs may also be less liquid than more traditional investments.
Important Information
This marketing communication is exclusively for use by professional investors in Continental Europe as defined below, Qualified Clients/Sophisticated Investors in Israel and Professional Clients in Ireland and the UK.
For the distribution of this communication, Continental Europe is defined as Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden and Switzerland.
Data as at March 2025, unless otherwise stated.
By accepting this material, you consent to communicate with us in English, unless you inform us otherwise. This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Views and opinions are based on current market conditions and are subject to change.
Issued by Invesco Investment Management Limited, Ground Floor, 2 Cumberland Place, Fenian Street, Dublin 2, Ireland, regulated by the Central Bank of Ireland.
Switzerland: Issued by Invesco Asset Management (Schweiz) AG, Talacker 34, 8001 Zurich, Switzerland. EMEA4262085/2025
Investment Risks: Click here for more information. For complete information on risks, refer to the legal documents. Value Fluctuation, Equity. Equity Linked Notes, Options Risk, Use of Derivatives, Country Concentration, Securities Lending. An investment in this fund is an acquisition of units in a passively managed, index tracking fund rather than in the underlying assets owned by the fund.
Terminology
OK, so let’s spell out what all the terms mean.
Call – an option to purchase the underlying asset; the buyer of a call option has the right to buy the asset, whereas the seller of the call has an obligation to sell it if the option is exercised
Put – an option to sell the underlying asset; the buyer of a put option has the right to sell the asset, whereas the seller of the put has an obligation to buy it if the option is exercised
Premium – the price of the option as determined by the buyers and sellers (note the option premium is entirely different than the strike price); the premium consists of two components: intrinsic value and time premium (see below for descriptions)
Strike price – the price that the underlying asset would be traded at if that option is exercised; strike prices are set at standard intervals according to the contract specifications.
Contract month – the month the option contract expires; the months are set by the exchange and can be found in the contract specifications.
Expiration date (expiry) – the exact date the option expires
Long – the position of someone who has bought the option, e.g., long call or long put
Short – the position of someone who has sold the option, e.g., short call or short put
At-the-money – an option with a strike price equal to the current price of the underlying asset
In-the-money – an option that has positive value if it was exercised at that moment, e.g., a call option that has a strike price below the current price of the underlying asset
Out-of-the-money – an option that has no value isf it was exercised at that moment, e.g., a call option that has a strike price above the current price of the underlying asset
Intrinsic value – how much the option is “in the money” (note that an at-the-money or out-of-the-money option will have no intrinsic value)
Time premium – the value of an option beyond its intrinsic value; time premium is determined by the buyers and sellers (what they think the option is worth) and can be influenced by volatility (see below) and the number of days before the option expires
Time decay – all else being equal, an option’s time premium will erode (or decay) throughout its lifetime, and this time decay accelerates closer to the expiration date
Volatility – a measurement of the price fluctuation of the underlying asset; an option’s price will increase as volatility in the underlying asset increases, and decrease if volatility decreases
American style – options that can be exercised at any time up to expiry
European style – options that can be exercised only at expiry
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