Editor’s Note: We’ve been fielding a lot of questions from concerned readers in recent weeks. Increased volatility and election-year jitters have prompted many of you to question the traditional “buy-and-hold” strategy.

Our options expert Jim Fink understands these challenges, which is why I periodically ask him to share safe and easy-to-follow options strategies he uses to generate consistent income. Today, he covers a few basics. — John Persinos, editorial director

Are you afraid of options? Do you avoid using them because you think they’re dangerous and risky, like some sort of mysterious alien creature? If so, your impression is mistaken. What if I were to tell you that options and stocks were closely related? In fact, that call and put options can be combined to mimic stock…EXACTLY.

Would you still be afraid? Knowledge is the cure for any fear.

The Molecules of Money

To understand the basics of options, let’s go back to your high school chemistry days. In chemistry terms, call and put options are the “atoms” that make up a stock “molecule.”

When you buy a stock, you are buying exposure to the full range of a stock’s price movement, up and down, for an unlimited period of time.

Stock is a very blunt investment instrument that’s sort of like being forced to buy a telephone package of local, long-distance, call waiting, caller ID, and voicemail when all you really want is a local dial tone.

Options allow you to limit your capital at risk to only those portions of a stock’s price movement that you want, and for only the period of time you think necessary. This provides you with virtually unlimited flexibility to tailor the trade to your liking at the lowest possible cost.

Calls and Puts

There are two types of options: calls and puts. And there are two sides to every option transaction: the party buying the option, who has a long position, and the party selling (also called writing) the option, who has a short position. Each side comes with its own risk-reward profile and its own strategies.

A call is the option to buy the underlying stock at a predetermined price (strike price) by a predetermined date (expiration, which is usually the third Friday of a month).

The expiration can be as soon as next month or as distant as a year or two away. If the call buyer decides to buy the stock, an act known as exercising the option, the call writer is obliged to sell his shares to the call buyer at the strike price.

A put option is the opposite of a call option, providing the put owner with the option to sell the underlying stock at a predetermined strike price until the expiration date. The put buyer has the right to sell shares at the strike price, and if he decides to sell, the put writer is obliged to buy the stock at that price.

A call buyer makes a profit when the price of the underlying shares rises. The call option’s price will normally rise as the shares do, because the right to buy stock at a constant strike price becomes more valuable if the stock is priced higher.

The call writer is making the opposite bet, hoping for the stock price to decline or, at the very least, not rise above the strike price by more than the amount he received for selling the call in the first place.

The put buyer profits when the underlying stock price falls. A put increases in value as the underlying stock decreases in value, because the right to sell stock at a constant strike price becomes more valuable if the stock is priced lower.

Conversely, a put writer is hoping for the stock price to rise or, at the very least, not decline below the strike price by more than the amount he received for selling the put in the first place.

The Bottom Line

Option buyers have unlimited upside/downside profit potential but must pay money up front for this privilege. In contrast, option sellers get a fixed amount of cash up front that immediately goes into their account earning interest.

While the option seller can lose money if the stock price moves in the wrong direction, I’ve developed a shrewd strategy that makes that scenario pretty rare.

In a new presentation, I explain the simple methods I deploy to rake in gains of 104%, 164%, and 203%…in as little as 72 hours and with mitigated risk. Want to get in on my next trades? Click here for details.