As I discussed in the first part of my options series, investors typically perceive options to be very risky and highly speculative. While this certainly true in many circumstances, that's not to say that it's impossible to use options of options to leverage an investment strategy.

While I focused on puts in my last options article, in this post I will focus on covered calls. Covered calls are the sale of call option contracts when you own the underlying stock, and therefore you are "covered." Unlike puts, where the option is exercised if the stock hits a predetermined price lower than the current price, calls are exercised if the stock hits a predetermined price higher than the current price.

Although covered calls have several different potential applications, in this post I'm going to focus primarily on one specific application -- generating income on a stock you would like to hold.

For many investors, constant buying and selling of stocks is unrealistic and undesirable. In fact, there is tremendous evidence to suggest that the more active an investor is the worse his returns are. As a result, many investors don't know what to do when a company they desire to hold reaches a price that they consider to be overvalued. Part of the investor believes over the long term the company's intrinsic value will continue to increase and he will regret selling now. But part of him wants to monetize the recent rally in the stock's price. In this situation, selling covered calls makes great sense.

Many investors in the stock market remain very skeptical of using options to their advantage simply because of what they read about in the popular press. They hear about the rampant speculation that occurs in the options market, the fact that most options contracts expire worthless, and so on. However, I believe even the most conservative of investors can find options helpful in one way or another. In a series of three posts I hope to expose you to my favorite options strategies:

• Cash-secured put
• Covered calls
• Put/Call credit spread

Cash-secured put

Cash-secured puts are rather simple to understand. Basically, it's the sale of a put with the cash needed if the put finishes in the money readily accessible. For those unfamiliar with puts, they are the right to sell stock to someone at a given price at a given time. For example, if I buy $450 puts on Google (NASDAQ: GOOG), I can later sell Google stock to the seller of the options contract at $450 when the put expires. If Google stock is below $450 at that time, say $400, I just made a $50 profit per stock. The seller of the contract, on the other hand, is forced to buy the stock at $450, as he or she loses $50 per stock. That means that buyers of puts are bearish on a given stock while sellers of puts tend to be bullish.