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ive been selling options for 8 months now and made a costly mistake early on that might help others. sharing this because it cost me real money to learn.
The mistake: chasing premium. When NVDA is at $186, you can sell a $175 strike for $315 premium (1.8% yield), a $170 strike for $155 premium (0.9% yield), or a $165 strike for $177 premium (1.1% yield). Obviously the $175 strike looks better right? 1.8% vs 1.1%? More money?
Wrong. Heres what i learned the hard way.
Easy profits I got felt like I should go for the highest premium strikes thinking i was being "invincible". Got assigned multiple times on positions i thought were "safe enough" and ended up holding bags for months, still holding some. What looked like 1.8% monthly turned into 0.6% actual return when you factor in the holding period. Boring math but it matters.
The better approach is to think about yield per month, not yield per trade. If your goal is consistent income (not trying to own the stock long term), you want strikes that give you 1-2% monthly yield, expire worthless most of the time, and let you repeat every month. Looking at current NVDA prices at $186 stock price, a $165 strike (11.4% OTM) gives you $177 premium and 1.1% yield. Probability of assignment is super low unless theres a major crash, which means you can repeat this monthly for 12-13% annual if consistent. Compare that to the $175 strike (6% OTM) which gives $315 premium and 1.8% yield, but way higher probability of assignment. Get assigned once and youre stuck for months.
Yeah the $165 gives you $138 less premium, but you actually get to collect it and move on. The $175 looks better until youre bag holding and cant deploy that capital elsewhere.
Dont just look at "yield %" in your broker. Calculate it like this: premium divided by collateral divided by days to expiration times 30 equals monthly yield. Example with the current strikes - a $175 strike with 25 days gives you $315 divided by $17,500 divided by 25 times 30 which is 2.2% monthly. A $165 strike with 32 days gives you $177 divided by $16,500 divided by 32 times 30 which is 1.0% monthly. But that 2.2% monthly only works if you dont get assigned. If you get assigned even once every 6 months, your actual yield drops way below the 1.0% "boring" strike.
Looking at NVDA right now at $186, id probably go with the $170 strike (8.7% OTM) with 18 days out. Thats $155 premium, 0.9% yield for this trade, around 12% annualized if i can repeat monthly, and low enough chance of assignment that i can actually repeat it. Is it boring? Yes. Do i collect massive premiums? No. But i also dont get stuck holding bags and i can actually hit that 12% annual target. The $175 strike pays more but ive been burned enough times to know that "more premium" often means "more problems."