Short put premium collection on a discretionary basket of stocks. The goal is recurring income from option premium — never stock ownership. Assignment is always avoided by rolling positions forward before the exercise boundary is breached. All cash remains invested long in stable ETFs; the puts are sold against the margin capacity of the account, with total notional exposure kept under 25% of liquid assets.
Sell put options on stocks you like at strikes below the current price. Collect the premium upfront. If the stock stays above the strike, the option expires worthless and you keep the full premium. If the stock drops toward or below the strike, roll the position out (and potentially down) to a later expiration before assignment can happen.
This is not the wheel strategy. If assignment occurs despite rolling efforts, the shares are sold immediately at a loss — the position is closed, and new puts are opened to continue collecting premium. There is no covered call phase.
Always target monthly expirations (3rd Friday of the month). Specifically, the first monthly that is at least 24 days from today. Monthly options are strongly preferred over weeklies because of liquidity — empirically, weeklies on the stocks traded here show 10-80% bid/ask spreads vs 1-7% on monthlies.
For a new position, select the lowest OTM strike with sufficient extrinsic value (at least 3% of the strike price). This means:
- The strike is below the current stock price (out-of-the-money)
- The premium collected is meaningful relative to the risk taken
- Illiquid strikes (bid = 0) are automatically excluded
Total notional exposure (sum of strike x quantity x 100 across all positions) should stay under 25% of total liquid assets. The puts are not cash-secured — the underlying capital is invested long in stable ETFs and similar instruments. The margin account provides the capacity to hold the short puts, but the goal is to never actually draw on margin.
Rolling is the primary defensive action. The goal is to always roll before assignment becomes rational — never let a position reach the exercise boundary.
The core risk metric is whether early exercise is rational for the option holder. A put holder considering early exercise forfeits the remaining extrinsic (time) value but gains immediate use of the strike price in cash. Exercise becomes rational when:
extrinsic value at bid < strike x risk_free_rate x DTE / 365
The right side is the exercise boundary — what the holder would earn in risk-free interest on the strike price for the remaining DTE. When extrinsic drops below this, exercising is economically rational.
The ratio of extrinsic to exercise boundary is the safety multiple. Higher is safer:
- Safe (>= 1.6x): extrinsic is well above the exercise boundary
- Warning (>= 1.2x but < 1.6x): extrinsic is getting close — monitor closely
- Roll immediately (< 1.2x): extrinsic is at or below the danger zone
The risk-free rate is pulled live from Schwab's option chain data per-stock.
All risk calculations use the bid price, not the midpoint:
- Assignment risk: the holder's alternative to exercising is selling the option. They'd receive the bid. If extrinsic at bid is near zero, exercise is rational.
- Sell to open: when selling a new put, the realistic fill is at or near the bid.
- Buy to close: uses the ask price (what we'd actually pay).
Using mid would systematically overstate both the premium received and the safety cushion.
Positions that are out-of-the-money but approaching expiration with meaningful delta face "pin risk" — a gap move could push them ITM when there's no extrinsic left to cushion.
Two levels of concern:
- Watch: |delta| >= 0.25 with <= 4 DTE — monitor closely
- Roll immediately: |delta| >= 0.10 with <= 2 DTE — assignment risk is real
The first monthly expiration (3rd Friday) that is at least 24 days past the current position's expiration date (not today). This ensures each roll buys a meaningful amount of additional time.
Evaluate all tradeable put strikes on the target expiration. The candidate range spans from the lowest OTM strike with >= 3% extrinsic to the highest ITM strike with >= 2% extrinsic. Within that range:
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Prefer credit: pick the lowest strike where the new premium received (bid x contracts x 100) exceeds the cost to close the current position (ask x contracts x 100). This minimizes risk while coming out ahead financially.
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Accept debit if necessary: if no credit roll exists, pick the highest strike in the range (deepest ITM with enough extrinsic). This buys time for the stock to recover, even though it costs money.
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ATM fallback: if no strikes meet the extrinsic thresholds at all, recommend the closest-to-ATM tradeable strike.
The new position should target roughly the same notional exposure as the one being rolled:
- Budget = current strike x current quantity x 100
- New contracts = budget / (new strike x 100), minimum 1
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Credit roll: you receive more premium from the new position than you pay to close the old one. This is the ideal outcome — you've reduced risk (lower strike or more time) while generating additional income.
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Debit roll: closing the old position costs more than the new premium. This happens when the stock has moved significantly against you. The roll still buys time for a recovery, but it locks in a partial loss on the current position.
Always prefer credit rolls. Debit rolls are a last resort to avoid assignment.
Despite diligent rolling, assignment can still occur (e.g., overnight gap, dividend-related early exercise, failure to roll in time). The procedure is:
- Sell the assigned shares immediately — do not hold
- Accept the realized loss
- Begin selling new puts on the same or different stocks to continue premium collection
There is no covered call phase. The strategy is always short puts, never long stock.
- Ask Price — The lowest price a seller is willing to accept for an option. When you buy to close, you pay the ask.
- Assignment — When the option holder exercises their right, obligating the put seller to buy shares at the strike price regardless of the current market price.
- At-the-Money (ATM) — An option whose strike price is equal to (or very close to) the current stock price.
- Bid Price — The highest price a buyer is willing to pay for an option. When you sell to open, you receive the bid.
- Bid/Ask Spread — The difference between the bid and ask prices, expressed as a percentage of the bid. A wide spread means higher trading costs and less liquidity.
- Buy to Close — Purchasing an option you previously sold to close out the position before expiration.
- Contract — One option contract represents 100 shares of the underlying stock. Selling 1 put contract at a $150 strike means $15,000 of notional exposure.
- Covered Call — Selling a call option on shares you already own. Used in the wheel strategy but not in this strategy.
- Credit — Net money received. A credit roll means the premium from the new position exceeds the cost to close the old one.
- Debit — Net money paid. A debit roll means closing the old position costs more than the new premium received.
- Delta — How much the option price changes per $1 move in the stock. For puts, delta is negative; a delta of -0.30 means the option gains ~$0.30 for every $1 the stock drops. Also roughly approximates the probability of expiring in-the-money.
- DTE (Days to Expiration) — Calendar days remaining until the option expires.
- Early Exercise — Exercising an option before its expiration date. For American-style options (which all equity options are), this is allowed at any time. It becomes rational when the extrinsic value forfeited is less than the interest earned on the proceeds.
- Exercise Boundary — The theoretical threshold below which early exercise becomes economically rational for the option holder. Calculated as: strike x risk-free rate x DTE / 365.
- Expiration — The date an option contract ceases to exist. After expiration, an OTM option is worthless. An ITM option is automatically exercised.
- Extrinsic Value — The portion of an option's price above its intrinsic value (the amount it's in-the-money). Represents time value and volatility premium. An OTM option's entire price is extrinsic. Extrinsic value decays toward zero as expiration approaches.
- In-the-Money (ITM) — For a put, when the stock price is below the strike price. The option has intrinsic value and the holder could profit by exercising.
- Liquidity — How easily an option can be traded at a fair price. High liquidity = tight bid/ask spreads. Low liquidity = wide spreads and higher trading costs.
- Margin — Borrowed money from the broker used to hold positions. Selling puts requires either cash to cover potential assignment or margin capacity. Margin incurs interest charges.
- Monthly Expiration — Options expiring on the 3rd Friday of each month. These are the most liquid option contracts. Contrast with "weeklies" which expire every Friday and typically have wider spreads.
- Notional Exposure — The total dollar amount at risk if all sold puts were assigned. Calculated as strike x contracts x 100 for each position, summed across all positions.
- Out-of-the-Money (OTM) — For a put, when the stock price is above the strike price. The option has no intrinsic value and would expire worthless if the stock stays there.
- Pin Risk — The risk that a stock near an option's strike price at expiration moves just enough (e.g., via a gap move overnight) to push an OTM option in-the-money when there's no time left to react.
- Premium — The price received when selling an option. This is the income generated by the strategy.
- Put Option — A contract giving the holder the right to sell 100 shares at a specified strike price by the expiration date. The seller (writer) is obligated to buy those shares if the holder exercises.
- Risk-Free Rate — The theoretical return on a zero-risk investment, typically approximated by U.S. Treasury yields. Used in the exercise boundary calculation to determine when holding cash (from exercising) beats holding the option.
- Rolling — Closing an existing option position and simultaneously opening a new one at a later expiration (and potentially different strike). "Roll out" = same strike, later date. "Roll down and out" = lower strike, later date.
- Sell to Open — Selling an option to initiate a new short position. You collect premium upfront and take on the obligation until expiration or until you buy to close.
- Strike Price — The price at which the put option can be exercised. If the stock falls below the strike, the put seller is obligated to buy shares at this price.
- Wheel Strategy — A cycle of selling puts until assigned, then selling covered calls on the assigned shares until they're called away, then repeating. This strategy does not use the wheel — assignment is always avoided.