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We all pick option strikes based on standard rules we have set for ourselves – say DTE and Delta and if somebody asks you how you sell covered calls, your reply is: "I sell 30 delta puts" or "I sell 20 delta calls."
The next question they put to you is – "how has it worked so far for you?". And probably your reply is "Most of the time it works, but I do get assigned sometimes. It hurts to lose a stock I would like to keep." In case of Cash secured puts you might end up saying "I hate to get saddled with a stock I did not want."
The problem is that choosing strikes based solely on Delta (and partly gut feel) creates a blind spot that many of us are not aware of. We know the probability of a strike getting hit (because delta told us so), but it tells you nothing about where the volume actually traded over the past 30 days. Two strikes with identical deltas can have completely different real-world risk depending on what the volume chart looks like underneath them.
That's where volume profile comes in. If you've never used it: it's just the volume chart turned sideways. Instead of showing how much traded each day, it shows how much traded at each price. Thick bars are called shelves (prices where tons of shares changed hands, where lots of people have their cost basis, and where price tends to slow down and get sticky). Thin bars are called 'air pockets' (prices the market skipped through quickly and there is nothing to grab onto when the stock is falling).
Three numbers matter:
\- POC (Point of Control) — the single price with the most volume. Acts like a magnet.
\- Value Area High / Low — the band containing \~70% of all the volume.
If you look at the Volume profile on NVDA for the past 30 days on any trading tool, you will find that the the stock spent most of the past 30 days inside this band -
POC at 217.89
Value area high at 226.96
Value area low at 208.69
As of yesterday closing. NVDA at 205 is trading below the entire value area. Keep that in mind. The explanation below will hopefully change your perspective on how you sell covered calls and cash secured puts.
**Covered call side (July 17, 36 DTE):**
A pure delta seller looks at the chain and grabs the \~30 delta call: the 220 strike for \~$5.05, which is a decent premium. However, the 220 strike sits barely $2 above the POC at $217.89 which was the most traded price on the entire chart. If NVDA were to suddenly start rising, this POC price is exactly where it will gravitate to. Delta says 30% and treats every 220-area strike almost the same. The chart says your strike is parked $2 above the most-traded price of the past month — the exact level price gravitates to on any bounce.
In contrast, a 230 strike, \~21 delta, \~$2.88 is above the value area high at 226.96. For your shares to get called away, NVDA must bounce off the lows, and the price has to work its way through the entire value area, not to mention the sticky POC price of $217.9 where things slow down. Agreed that you collect less premium, but there is a higher likelihood of you getting to keep the shares of NVDA that you love to hold on to.
**Cash-secured put side:**
If you wanted to sell a cash secured put on a stock you wouldn't mind owning at the right price, you believe NVDA had been down for a while and it is easy money if you sold a \~30 delta put $10 below the current price, 195 strike for $5.80. This is the trap that you do not want to fall into.
What delta is telling you is that there is a 70% chance it will expire worthless and you get to keep $580.
NVDA has already fallen out of value area low at $208.69. There is no thick volume shelf directly underneath the current price. The heavy cost-basis support is above $205 (at $208.69), not below it. So that "70% safe" is no longer a safe bet.
So you have two choices. (A) go further down to the 190 strike (\~25 delta, \~$4.31) to buy additional safety cushion (B) wait for price to reclaim 208.69 and sell the put after there is a shelf under it again.
I stick to option (B) - Sometimes the best trade is not to trade at all till the time is right.
I pick a strike above the Value Area High price in case of covered call and a strike below the Value Area Low price, if and only if the stock has reclaimed the value area low (in this example, $208.69).
Will this method always provide the desired outcome? NO.
Earnings, geopolitical issues, overnight news ignore all levels on a chart. Volume profile shifts odds in your favor. Position sizing and your profit-taking rules still do most of the work.