There are strategies out there using both options and something called “hybrid options” to help investors use their existing stocks to generate income, including covered call writing, put selling and hybrid options securities like Stock Return Income Debt Securities (STRIDES).

Here’s how to use these strategies, plus three options trades you’ll be getting paid to make.

Options Strategy #1: Covered Calls

There’s an options income strategy for every level of investor, and one of the easiest to implement and understand is covered call writing. Simply put, covered call writing means selling calls against stocks that you already own.

Covered call writing is a bet that a stock you already own will continue moving up or will trade sideways for a bit. The calls you sell (also known as “writing”) are considered “covered” because you already own the underlying stock. This means if you are “called” to produce the stock, you are covered because you already have the shares.

Get 7 Tips for Writing Covered Calls here.

Income-Generating Options Trade #1:
Sell AXP Sept 35 Calls (ABZIG)

Financial stocks have outpaced every other sector in the latest move up for the S&P 500 (SPX). American Express (AXP) is one of the leaders in the latest rally for financial stocks. The stock enjoyed a technical breakout at $30 and has since rallied up to $34, where there is some serious overhead technical resistance that comes into play.

One of the ways investors can stay on a bull train, bring in some extra income and hedge their downside at the same time is to employ a buy-write strategy. A buy-write is a covered call strategy where you simultaneously purchase the stock and write the call contract.

With volatility so high, you can buy the shares of American Express (AXP) at $33 and then simultaneously sell the AXP Sept 35 Calls (ABZIG) for $1.25 per contract.

If the stock is trading above $35 by the closing bell on the third Friday of September, those shares will most certainly be called away for a $2 gain. Add the $1.25 in call premium collected and you pocket $3.25 per share. Divide that $3.25 gain by the cost basis of $33 and you get a 45-day return of 9.84%.

If you can roll your capital on a consistent basis every six weeks, you can understand why asset managers love this strategy. Plus, the $1.25 call premium brought in acts as a 5% downside hedge against any pullbacks or potential losses if the stock rolls over. It’s a time tested tool for taking some money off the table without having to sell the stock.

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Options Strategy #2: Naked Put Writing

Another way to use options to generate income is a naked put-write, which simply means you sell puts on stocks that you don’t currently own but might like to. With this strategy you get income up front for selling, or writing, the put.

You shouldn’t be intimidated by naked puts. If you can buy an option, then you can sell an option. The caveat, however, is that you might end up owning the stock, which is why it’s imperative that you only establish put-writes on fundamentally solid stocks that you would be happy owning — even at reduced prices.

Investors like writing puts because it helps them to buy stocks at a discount or to get paid while they wait.

Learn more about how to make money going ‘naked.’

Income-Generating Options Trade #2:
Sell MRK Sept 32 Puts (MZRUD)

As earnings season unfolds, I like seeing which companies post much better-than-expected numbers, where the underlying stock reacts strongly to the news, as if the story for the company, in this case Merck (MRK), has changed materially.

Just like the technical textbook teaches, after Merck shares gapped higher, they have spent the past two weeks consolidating, back and filling, setting up the stock for the next move higher. Once the stock kissed the 20-day moving average, it turned back up, just like the rule book says it should. It’s right at this reversal point for the stock that traders want to sell naked puts against the stock.

I recommend selling the out-of-the-money MRK Sept 32 Puts (MZRUD) at $2.60 per contract. Selling one naked put means you are willing to take possession of 100 shares of Merck (MRK) if the stock closes below $32 by expiration day.

Because Merck is an institutionally traded name, I believe fund mangers will walk the stock up to $34-$35, whereby anyone who sells the naked put will keep that $2.60 premium for no out-of-pocket cost other than having enough buying power in the account to purchase that 100 shares of MRK if, in fact, the stock does close below $32 and the market “puts” the stock into the trader’s account.

If the stock closes above $32 on expiration day, then that $2.60 is 100% profit. Nice!

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Options Strategy #3: STRIDES

A third way of generating some income is to buy convertible securities known as Stock Return Income Debt Securities, or STRIDES, that are tied to the performance of the underlying stock by using puts and calls to manufacture the derivative income stream.

These hybrid securities are structured like bonds that mature in a fairly short time frame (one to two years), which allows you to get fairly quick profits while still enjoying long-term taxation.

Even better, each pays a dividend yield. I like these kinds of products because they pay 9%-12% in a world where one-year CDs are near record lows.

The downside here is that these types of positions are often less liquid than traditional options because, in most cases, you must go through a broker to get them.

Learn the ins and outs of STRIDES.

Income-Generating Options Trade #3:
12% Monsanto STRIDES (MYX)

The 12% Monsanto STRIDES due March 26, 2010 (MYX) are a way to play one of the strongest agricultural names within the broader commodity sector.

All STRIDES are priced at $25 per share when brought to market, priced off the underlying stock that day. Shares of Monsanto (MON) were trading right around $100 per share at the time of the pricing, so you take $25, divide it by the price of MON, and you would receive 25 shares of stock if the STRIDES aren’t called away before they mature.

Like any good investment, you want to take advantage of the stock when it’s down, and MON shares are way off their 2008 highs, but have recently started to turn back up with the rally.

From the chart above, it is easy to see how interest swelled into shares of MYX recently with the bullish sentiment rotating back into agriculture stocks. If MON trades back up to $110 between now and March 26, 2010, shares of the 12% Monsanto STRIDES (MYX) will likely be called away at a 20% premium from where they traded today, not including the 12% in dividend income.

Not bad for an income play.