Benefits of selling options:
1. You get paid your potential profits up front in the form of the option’s price or premium.
2. If the option expires out of the money, which most options do, then no one will want to exercise the contract and you will keep your entire premium.
3. As time value melts, the decline in the option’s value reduces your liability and risk as the options seller.
Choosing the right strike to sell:
Option buyers use a contract’s delta to determine how much the option contract will increase in value if the underlying stock moves in favor of the contract. Delta measures the rate of price change in an option’s value versus the rate of price changes in the underlying stock.
However, option sellers use delta to determine the probability of success. 8 A delta of 1.0 means an option will likely move dollar-per-dollar with the underlying stock, whereas a delta of .50 means the option will move 50 cents on the dollar with the underlying stock.
An option seller would say a delta of 1.0 means you have a 100% probability the option will be at least 1 cent in the money by expiration and a .50 delta has a 50% chance the option will be 1 cent in the money by expiration.3 The further out of the money an option is, the higher the probability of success is when selling the option without the threat of being assigned if the contract is exercised.
Choosing your expiration:
In general terms, selling has more advantage on the shorter term due to the way prices decay (theta). The “normal” boundary for selling is about 45 days, some may go out to 60. Beyond that, you’d be better off selling shorter term again and again.