Picking a put strike, by delta and by support

A put delta of 0.30 means roughly a 30 percent chance of finishing in the money and being assigned. Lower delta means a lower strike, less premium and less chance of buying the shares. The strike you pick should be a price you want to own the stock at, with delta telling you what that patience costs.

There are two honest ways to pick the strike and one dishonest one. The dishonest one is picking the premium you want and reading the strike off the row it appears on.

Method one: delta

INTC at $34.80, 45 days to expiry. Four strikes off the same chain.

$34 put, 0.42 delta, $1.35. $135 on $3,400 secured. 3.97 percent in 45 days, about 32 percent annualized. Assignment odds roughly two in five.
$32 put, 0.28 delta, $0.78. $78 on $3,200. 2.44 percent, about 20 percent annualized.
$30 put, 0.16 delta, $0.40. $40 on $3,000. 1.33 percent, about 11 percent annualized.
$28 put, 0.08 delta, $0.18. $18 on $2,800. 0.64 percent, about 5 percent annualized.

Look at the shape of that. Dropping from 0.42 delta to 0.28 costs you 42 percent of the premium and buys you a strike $2 lower. Dropping from 0.16 to 0.08 costs you more than half the remaining premium to move the strike $2 again. The premium does not fall linearly. It falls off a cliff.

Which is why the far out-of-the-money strikes that feel safest are usually the worst trades on this chain. Eighteen dollars, for 45 days, on $2,800 of your money, with a real tail that can still take $2,800 of it. You are not being paid enough to be right.

What delta is and is not

Delta approximates the probability of finishing in the money. It is close enough to use and it is not the true probability: it comes out of a model that assumes a lognormal distribution and a constant volatility, and real stocks do neither. It runs a little rich in the tails and a little light near the money.

It also says nothing about the path. A 0.16 delta put has an 84 percent chance of expiring worthless and a much higher chance than that of trading against you at some point during the 45 days, which is the number that determines whether you actually hold the position to expiry.

Method two: support, which needs a caveat

Pick the strike at a level that means something on the chart. The March low. The level it bounced off twice. The 200-day. The price it gapped up from in January.

This works better than it should, for a reason that has nothing to do with technical analysis being predictive: it forces you to name a price for a reason other than the premium. That is most of the benefit. Whether $30 on INTC is genuinely more supported than $30.50 is not knowable, and anyone telling you otherwise is guessing with more confidence than the data supports.

Use it as a tiebreaker, not a system. Between the $32 and the $30 put, if $30 was where it based for three weeks in the spring, take the $30.

The test that outranks both

Would you buy 100 shares of INTC at this strike, today, with this cash?

If you would not buy it at $34, the $34 put is not a good trade no matter what the delta says. If you would happily own it at $30 and you are selling the $34 anyway because it pays more, you have picked a strike you do not want at a premium you liked the look of, and you will be assigned at $34 in the exact scenario where you wish you had waited.

Where to actually land

For most people selling puts on stocks they want, 0.20 to 0.30 delta, 30 to 45 days out. That range pays enough to be worth the capital and assigns often enough that the strategy stays honest about what it is: a way of buying stock with a discount attached, not a way of never buying stock.

Below 0.15 delta you are collecting rounding errors and carrying full downside. Above 0.40 you are effectively buying the stock with extra steps, and if that is what you want, the comparison against just buying it is worth reading first.

OptionsKing scores every candidate strike on a deterministic 0 to 100 scale and shows you nothing below 60, at any setting, with 75 the recommended bar. How it works covers what that guarantees.

Questions people actually ask

What delta should I sell puts at?

Most premium sellers land between 0.20 and 0.30 for a 30 to 45 day expiry. That range pays enough to justify the tied-up capital and assigns often enough that you should only be selling at strikes you genuinely want to own.

Does delta equal probability of assignment?

Roughly. Delta approximates the chance of finishing in the money, which is what triggers assignment at expiry. It comes from a model that assumes a lognormal distribution, so it is an estimate, not a measurement.

Is a lower strike always safer?

Lower odds of assignment, yes. Safer, no. A 0.08 delta put still carries the full loss down to zero and pays you almost nothing for it, which is a poor trade rather than a cautious one.

Should I use support levels to pick a strike?

As a tiebreaker. Its real value is forcing you to name a price for a reason other than what the premium looked like. Do not confuse that discipline with an ability to predict where a stock stops falling.

Keep reading

Do the math on your own trade

Every price in this article is an illustrative worked example, not a quote. Read Cash-secured puts for the rest of the series, and the disclaimer before you act on any of it. Selling options carries real risk of loss, and the loss can be far larger than the premium you collected.