How to choose the best strike price for options writing

General
1

Hi,

Assume i have 100 xyz shares and i have decided to write options. So obviously I would choose the highest value as I would get the best premium.

No one wants to sell options with a low premium right?

Now what am I missing to understand about Options writing?

Thanks.

Edit: I misunderstood that the out of money options will be priced as the same as “In the money”. Most of the examples I found were like that. So now I understand,

  1. In the money options: call/put sellers expect the contract to expire worthless. Even though when the contract is exercised, there could be a “time value” in the premium that could make the trade profittable. I believe that should be more in the starting of the month.
  2. Out of the money: The contract price is so low. If we sell OOM options by having the underlying asset, that will yield small ROI even though the option expires worthless. If OOM is sold with out having the underlying asset that could result in a disaster trade some day.
2

Many people prefer to write options with low premium because the probability of it expiring worthless is high even though profits are low. And it has nothing to do if you have shares in your account.

1 Like
3

Everything that you needed to know about trading options including option writing - http://zerodha.com/varsity/module/option-theory/

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4

At the money option premium will be high and has great time value and also risky.So sell near nifty level strikes with essential/must stop loss for avoiding unlimited huge loss.

5

Thank you Karthik. Im reading.