Selling options is a popular strategy for generating income, but selecting the right contract can be critical to maximizing profits while minimizing risks.
We’ll also explore how to trade 0DTE and far OTM options with trading examples.
1. Choosing the Best Delta When Selling Options:
Delta represents both the probability of the option expiring ITM and how much the option price will change with a $1 move in the underlying asset.
-0.15 Delta Option:
— Strike: $90 Put
— Premium: $0.50 (or $50 per contract)
— Probability of expiring ITM: 15%
— The option seller has a high probability (85%) of keeping the premium and not being assigned.
-0.30 Delta Option:
— Strike: $95 Put
— Premium: $1.50 (or $150 per contract)
— Probability of expiring ITM: 30%
— The option seller receives a higher premium but has a 30% chance of assignment and being forced to buy the stock at $95.
Why Choose 0.15–0.30 Delta?
Lower Delta (0.15): Selling the $90 put gives you a smaller premium but with a lower chance of assignment. This is ideal for conservative traders aiming for steady income.
Higher Delta (0.30): Selling the $95 put offers more premium but increases the risk of assignment. This suits more aggressive traders seeking higher returns.
Strategy:
If you’re looking to collect premium consistently with lower risk, aim for a **delta between 0.15 and 0.30**. The lower delta options have a lower chance of being ITM at expiration but still offer decent premium income.
2. Choosing Implied Volatility (IV) and IVR When Selling Options
-Implied Volatility (IV) reflects the market’s expectation of future volatility, while IV Rank (IVR) compares the current IV to its 52-week range.
Example:
Let’s say the stock has an average IV range over the past year of 20%-40%, and its current IV is 35%.
- IV Rank = 75% (Since 35% is closer to the higher end of the historical range)
— High IVR (above 50%) signals that options premiums are elevated.
— A higher IVR (75%) suggests it’s an opportune time to sell options because of inflated premiums.
Case:
- Stock Price: $100
- IV: 35% (IV Rank = 75%)
- Delta 0.20 Put (Strike Price: $90):
— Premium: $2.50 (or $250 per contract) due to elevated IV.
— If IV drops after the trade, the option’s price decreases quickly, allowing the seller to profit from premium decay and volatility contraction.
Why High IVR is Important?
- High IVR means inflated option premiums, allowing sellers to collect more upfront.
- After high IV events (e.g., earnings), IV tends to contract, causing the premium to drop, which is favorable for option sellers.
3. Determining the Best Strike Price Based on Different Strategies (ATM/ITM/OTM)
Example:
Let’s assume a stock is trading at $100.
- ATM (At-the-Money):
— Strike: $100 Call or Put
— Premium: $3.50 ($350 per contract)
— ATM options provide the highest premium, but they have the highest chance of expiring ITM. - This is ideal for short straddles or iron condor strategies, where you want the underlying asset to remain near the strike price.
- ITM (In-the-Money):
— Strike: $105 Call or $95 Put
— Premium: $6.00 ($600 per contract)
— ITM options have a higher likelihood of assignment. - In a covered call strategy, selling the $95 put locks in profits, assuming the trader is comfortable being assigned shares at a lower price.
- OTM (Out-of-the-Money):
— Strike: $90 Put
— Premium: $1.50 ($150 per contract)
— The $90 strike is further from the current price, meaning the option is less likely to be exercised, but the premium collected is smaller.
OTM options are ideal for cash-secured puts or covered calls where the trader wants to reduce assignment risk.
Strategy: If you want lower risk and prefer high-probability trades, focus on OTM options. If you’re willing to accept more risk for higher premiums, you can trade ITM or ATM options.
4. How to Trade 0DTE (Zero Days to Expiration) and Far OTM Options
0DTE Options (Zero Days to Expiration):
0DTE options are contracts expiring the same day and involve rapid time decay.
Example:
Let’s say it’s Friday, and the SPY ETF is trading at $400. You want to sell options expiring that same day.
Sell 0DTE Put with a 0.10 Delta (Strike $390):
— Premium: $0.50 ($50 per contract)
— The goal is to capture this premium as the option’s value decays rapidly with no time left to expiration.
— Risk: A sudden market move can put you ITM quickly.
It’s important to monitor 0DTE trades closely, as time decay works in your favor, but large moves against you can result in significant losses.
- 0DTE Iron Condor:
— Sell $410 Call (0.10 delta) for $0.50 and sell $390 Put (0.10 delta) for $0.50. Total premium = $1.00 ($100 per contract).
— The strategy profits from the underlying asset remaining between the strike prices and time decay working in your favor. This strategy requires quick adjustments if the price moves sharply.
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Far OTM Options:
Far OTM options have a very low delta (0.05 or less), providing small premiums with minimal risk of assignment.
Example:
- Underlying Stock Price: $100
- Far OTM Put (Strike $80, Delta 0.05):
— Premium: $0.25 ($25 per contract).
— Selling far OTM options is ideal in high-volatility environments where premiums are still inflated, but the chance of being ITM is very low.
Strategy: Far OTM options are suitable for iron condors or vertical spreads where the goal is to collect premium with minimal risk. This works well in high IV environments, where far OTM options still have a decent premium due to inflated volatility expectations.
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Conclusion
In practice:
Delta:
- Selling options with a delta of 0.15–0.30 gives a good balance between premium income and the probability of the option expiring OTM.
- IV and IVR: High IV and IVR (>50%) allow you to collect inflated premiums, making option selling strategies more profitable.
- Strikes (ATM, ITM, OTM): OTM options are best for conservative traders focusing on premium collection, while ITM or ATM options suit more aggressive strategies.
- 0DTE: Use options with delta 0.10–0.20 to capitalize on rapid time decay, and stay vigilant for sudden market moves.
- Far OTM: Selling far OTM options (delta 0.05 or lower) in high volatility environments can yield small but safe premiums.
Balancing these factors ensures you maximize your premium income while managing risks effectively.