Yea, uh, so what does that mean. When initiating a new contract I’ll be looking for something with around 45 days to expiration. 45-60 is fine with me, it just depends on how all the stars line up. Also I would like a better than 50/50 chance that I’ll have a winner. So, I’ll pick an option that give me around a 68% chance of being out of the money.
Sound complicated? Not really. ThinkorSwim does all the work for you/me. In the trade tab when you are looking at the option chain, just display the Probability of Out of the Money column.
So if I wanted to sell a put at this very moment: V is at 176.44:
I would pick 47 days to expiration, a 170 strike price to collect a 2.12 premium with a 70.1% chance of expiring out of the money. This give you downside protection to 170 – 2.12 = 167.88. That’s an 8.56 drop. Remember though, I’m happy enough to have the shares put to me. I’m into Visa for the long haul. If I end up with shares, I just switch gears and start writing covered calls against them until they are called away, and I start all over. This is very much a rinse and repeat mechanical process