To The Moon

In a previous post, I shared my approach to stock selection as a way to reduce risk. To recap: I sell options on fundamentally strong, profitable companies that I’m comfortable owning. This lets me earn premiums while reducing downside risk—helping me sleep well at night.

In this post, I’ll focus on another key risk-management element in my option wheel strategy: determining the price at which I’d be comfortable owning the stock.

Objective: Reduce Assignment Risk

My primary goal when selling puts is not to get assigned. If the option expires worthless, I keep the premium without having to purchase the stock. This allows my capital to stay invested—such as in Tiger Vault—to continue earning interest while I collect income from premiums.

Option Selection Criteria

To tilt the odds in my favor, I typically sell short-dated puts (1–2 weeks to expiration), as time decay (theta) accelerates significantly in the final days before expiry. I avoid stocks near earnings announcements unless I’m specifically playing an earnings trade due to high premiums. Sudden price moves are less likely outside of those events.

When evaluating whether to sell a put option and at what strike price, I consider the following factors:

1. Expiration Date and Earnings Timing

• The option should expire within the next 10 days.

• The next earnings date should fall after the expiration.

• (Exception: I occasionally trade during earnings weeks if premiums justify the additional risk.)

2. Stock Price Trend

• I avoid stocks that are clearly in a downtrend.

• Ideal candidates are rangebound or slowly rising stocks, which tend to offer decent premiums with reduced downside risk.

3. Support Levels

• The strike price should be at or below a recent support level.

• I look for price zones where the stock has repeatedly bounced off the same low—indicating buyer interest and possible price stability.

4. Premium and Return Potential

• The premium collected should provide an attractive annualized rate of return, even if the put expires worthless.

• I target 20–30%+ annualized returns as a rule of thumb.

Here’s a simple formula I use to estimate annualized return:

Annualized Return = (Premium/Strike Price) * (365/Days to Expiry)

Example:

• Strike Price: $50

• Premium: $0.50

• Days to Expiry: 7

($0.5/$50)*(365/7)=0.52 or 52%

This metric helps ensure I’m being adequately compensated for the risk I’m taking.