📚 Educational Corner: Options Deep Dive

🎓 Topic of the Week: Selling Options Without Regret: How to Avoid the Most Common Premium Selling Mistakes

At first glance, selling options looks like free money.

You collect a premium upfront, and as long as the market doesn’t move too much, you keep the profits. You’re playing the role of the “house” in a casino, and the odds seem stacked in your favor.

Until they’re not.

Too many traders fall into the illusion of safety with premium selling—until a sudden volatility spike or an unexpected market move wipes out months of steady gains in a few days.

But the problem isn’t premium selling itself—it’s how most traders approach it.

This article will break down:
✅ The most common mistakes premium sellers make (and how to avoid them)
✅ How to structure safer trades that maximize premium while minimizing risk
✅ How to use IV Rank (IVR), Expected Move, and Delta to improve trade selection
✅ The right way to manage risk without blowing up your account

If you want to sell options profitably without regrets, let’s get started. 🚀

1️⃣ Why Many Traders Fail at Selling Premium

🔹 Mistake #1: Selling Too Close to the Money

Many traders sell options that are too close to the stock price because the premiums look juicier.

For example, suppose SPY is trading at $575, and a 575 strike short put (going out 40 days until expiration) pays $14.00 in premium, while a 550 strike put only pays $6.50.

The delta of the 575 put strike is 50, while the delta of the 550 put strike is 25. A probability of success of 50.7% versus 73.1%, respectively.

Many beginner traders instinctively choose the 575 strike or a nearby at-the-money option because it offers a higher premium, without fully considering the probability of success, the role of the law of large numbers, and how statistical probabilities shape long-term outcomes.

How to Avoid It:
✅ Use Delta to control risk. A delta of 15-30 is ideal for high-probability premium selling.
✅ Sell options outside the Expected Move to increase the likelihood of profit.

💡 A smarter approach: With SPY trading at 575 and an expected move of 35, focus on selling strikes below 540. For example, selling the 540 put instead of a strike closer to the current price offers a lower premium but significantly increases the probability of profit by staying outside the expected move. The SPY April 17, 2025 540 put strike is worth $5.05. The delta is 19 and the probability of success, a healthy 78.5%.

🔹 Mistake #2: Selling Premium in Low IV Environments

Selling options works best when IV is high—because you collect more premium and benefit from IV contraction.

The problem? Many traders sell options when IV is low and wonder why their trades aren’t making money.

For example, if IV Rank (IVR) is below 20%, option premiums are cheap, and there’s little room for IV to drop further—meaning theta decay is your only edge.

How to Avoid It:
✅ Only sell premium when IV Rank is above 35% (ideally above 50%).
✅ Check IV Percentile to confirm IV is at a historically high level.

💡 Better Trade: If IV is low, consider debit spreads or wait for a volatility spike before selling premium.

🔹 Mistake #3: Ignoring Position Sizing and Portfolio Exposure

Many traders sell too many contracts relative to their account size, leaving them overexposed.

For example:
🔴 Selling 10 naked puts on SPY in a $50,000 account exposes you to a potential $500,000 notional position—which is insane risk given the account size.

How to Avoid It:
✅ Keep total premium selling exposure under 30% of account capital.
✅ Use defined-risk strategies like Iron Condors and Jade Lizards when sizing up.
✅ Use a diversified approach by incorporating multiple, non-correlated options strategies that capitalize on different market conditions and varying timeframes.

💡 Better Trade: Instead of 10 naked puts, trade risk-defined strategies like a put credit spread or iron condor to limit downside risk.

2️⃣ How to Structure Safer Premium Selling Trades

🔹 Use IV Rank (IVR) to Find the Best Trades

Why it matters: IV Rank tells you where today’s IV sits compared to the past year.

• IV Rank above 35% → Good for selling premium

• IV Rank above 75% → Great for selling premium

• IV Rank below 30% → Avoid premium selling

🔹 Use Expected Move (EM) for Smarter Strike Selection

The Expected Move tells you how much the market expects a stock to move.

For example:

• If SPY’s expected move is ±$20, selling a put within that range typically corresponds to a one standard deviation move or less.

• Selling a put outside the Expected Move increases your probability of success, typically 75%+.

💡 Best practice: Sell options beyond the Expected Move for high-probability trades.

3️⃣ Risk Management: The Right Way to Manage Premium Selling Trades

🔹 Set Stop-Losses and Profit Targets

Too many traders hold onto short premium trades until expiration, letting winners turn into losers.

The right approach?
✅ Start taking profits at 50% max profit.
✅ Cut losses if a short option doubles in value.

💡 Example: If you sell a put for $5.00, start taking profits at $2.50 and cut losses if it reaches $10.00.

🔹 Roll and Adjust When Necessary

If a trade moves against you, what’s better—taking a loss or adjusting?

✅ Rolling out and down extends trade duration and increases the probability of profit. Use delta as a guide to determine the optimal time to roll.
✅ Hedging with spreads or futures can reduce directional risk by delta hedging.

💡 Want to read more about delta hedging?

Final Thoughts: How to Sell Options Without Regret

Selling premium can be one of the most consistent ways to make money in options trading—but only if done correctly.

✅ Avoid common mistakes like selling too close to the money, trading in low IV, and overexposing your portfolio.
✅ Use IV Rank, Expected Move, and Delta to structure smarter trades.
✅ Manage risk proactively with stop-losses, adjustments, and proper sizing.

🚀 Trade wisely. Manage risk. Stay ahead.

Andy Crowder

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