Why Chasing High Premium Can Backfire in Options (And How to Think About Premium the Right Way)

When traders first discover the world of options selling, the appeal is almost magnetic:
Sell a put or a call, collect a juicy premium, and let the slow grind of time decay (theta) work in your favor — day after day, week after week. It seems almost too good to be true.

And that's exactly where the danger lies.

Because here’s the truth no one tells you upfront: The biggest premiums often come tied to the biggest risks.

Chasing the fattest premiums — without understanding the hidden traps underneath — is one of the fastest ways to torch an account. Many new traders fall into this trap, confusing premium size with opportunity, when in reality, it often signals volatility, uncertainty, and events that can blindside even the most seasoned pros.

If you focus only on the payout and ignore the probabilities, it’s not a question of if you’ll get caught — but when.

In today’s article, we’ll break down why high premiums are often a warning sign, not a reward, and more importantly, how to build a smarter framework for balancing premium collection with risk management — so you can trade with greater consistency, resilience, and long-term success.

Sellers who succeed long-term know the difference between chasing payouts and managing probabilities.

Let's dig in

The Siren Song of High Premiums

At first glance, selling options seems almost too simple. A $5 premium looks better than a $1 premium. You think: “More cash upfront = better deal. Why wouldn't I take it?"

But in options trading, premium is never free money. Premiums are not random — they’re a direct reflection of the risks the market sees ahead.

Here’s what’s really happening when you see a "juicy" premium:

1. Higher Volatility (IV) = Higher Premiums = Higher Risk

When implied volatility (IV) is high, option prices rise. Why? Because the market expects bigger price swings in the future — and bigger moves create greater uncertainty for both buyers and sellers.

Think of it this way: A stock that's been moving quietly within a 2% range isn’t going to have expensive options. A stock about to report earnings, facing a lawsuit, or tied to a major economic event could easily move 10% or more — and the options market knows it. The premium compensates you for taking on that risk. But the key point is: bigger swings mean a higher probability that your position moves against you.

2. Lower Probability of Success

The bigger the premium, the closer your short strike sits to the current stock price — but more importantly, well inside the expected move.

That means:

• Your margin for error shrinks.

• Your probability of success (the option expiring worthless) drops.

• Your consistency — the real key to long-term trading success — becomes much harder to maintain. The law of large numbers always prevails.

Put simply: You’re getting paid more because the market sees greater risk, or a greater chance you’ll lose.

3. Wider Expected Move = Harder to Manage Trades Effectively

Every option has an expected move — a statistically likely range the underlying stock could travel by a specific expiration date. Expected moves are calculated mostly using implied volatility (IV) and time to expiration.

When implied volatility rises, expected moves expand. The market is pricing in greater uncertainty and bigger potential swings.

When implied volatility falls, expected moves contract. The market anticipates smaller, more stable price action.

Expected move is essential when selecting strikes. As premium sellers, we typically place our short strikes outside the expected move to increase the probability that the stock stays within a manageable range. Selling options inside the expected move invites more risk, while positioning outside gives the trade a statistical cushion based on the market’s own pricing models.

Managing trades based on expected move helps align strike selection with real, measurable probabilities — not guesses or hope.

In short: The market doesn't hand out fat premiums out of generosity.
You’re not getting "rewarded" — you’re getting compensated for taking on more uncertainty.

A Beginner-Friendly Analogy

Imagine an insurance company offering $5,000 premiums to insure homes in a calm suburb. Now imagine them offering $50,000 premiums to insure homes in a wildfire zone.

The big premium isn’t a better opportunity — it's a warning. The risk is much greater — and they know the odds of a claim are much higher.

Options work the same way. The bigger the premium, the more likely it is that you're stepping into a zone of danger — not opportunity.

The Right Way to Think About Premium

Instead of asking: "How much premium can I collect?"

Ask: "How much risk am I taking to earn this premium — and is it worth it?"

Smart premium sellers focus on:

• Probability of profit (POP) — Use probability of out-of-the-money (POTM) and delta levels (~15–30 delta often ideal).

• Implied Volatility Rank (IVR) — Focus on environments where IV is relatively high historically, but not absurdly unstable.

• Expected move analysis — Ensure your short strikes are outside normal expected moves based on options pricing.

• Portfolio risk — Size your trades so that no single blow-up can cripple your account.

Key Takeaways

• Premium is not "free money" — it’s compensation for risk.

• High premiums often come with higher volatility and event risks.

• A sound probability framework matters more than premium size.

• Stay consistent: control position sizing, focus on high IV rank environments, and favor high-probability trades.

• The goal isn't to collect the biggest premium — it's to survive and thrive across hundreds of trades.

In the end, your trading edge comes from discipline, not from chasing the biggest paycheck. In options, boring is profitable.

Probabilities over predictions,

Andy Crowder

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