u/ProgramNo456 5.0 3 ideas

The author explicitly warns against selling puts on "high-IV small-caps," stating that "Fills are pure shit" for these instruments. The Russell 2000 (IWM) is the primary index and ETF for US small-cap stocks. The characteristics the author warns against—high implied volatility, event risk, and low liquidity in individual names—are hallmarks of the small-cap universe. This creates a high-risk environment for premium sellers due to wide spreads and poor fill quality. Based on the author's criteria, small-cap stocks and, by extension, their primary ETF (IWM), should be avoided for premium-selling strategies due to the high probability of encountering the exact liquidity and fill quality issues that destroy returns. An investor could miss out on periods of high premium generation in small caps if volatility spikes and they are able to secure good fills. Some individual small-cap names may have better liquidity than the average.

The author references a cautionary tale about a trader opening a large AVGO position without understanding how spreads work. AVGO is a high-priced, high-IV, large-cap tech stock. While the reference is a warning, it also highlights AVGO as a name that attracts significant options volume but can have wide spreads, especially on large orders. This makes it a perfect candidate for the author's liquidity analysis framework. Before selling premium on a name like AVGO, a trader should use the author's checklist: analyze the bid-ask spread at the desired delta, check the number of liquid strikes for rolling, and assess the open interest distribution to avoid liquidity traps. AVGO is subject to high volatility from earnings, AI sector news, and market sentiment shifts. Even with good liquidity, a sharp adverse move can make rolling difficult and lead to significant losses.

The author contrasts the experience of trading thin, illiquid names with trading highly liquid instruments like SPY, noting that "20 contracts on a thin name is very different from 20 on SPY." This implies that for strategies sensitive to liquidity and fill quality, such as selling premium, highly liquid underlyings like SPY are superior choices. They offer tight spreads, deep order books, and numerous strikes with high open interest, mitigating the "rolling trap" and slippage costs. The author's framework implicitly favors trading options on highly liquid, large-cap ETFs like SPY over high-IV, illiquid small or mid-cap stocks to minimize transaction costs and ensure ease of position management. The primary risk is that the premium collected on highly liquid ETFs like SPY is significantly lower than on high-IV stocks, potentially leading to lower overall returns if volatility remains low. The strategy also remains exposed to systemic market risk.