Tip #6 – Choose Your Strike Prices Carefully
Choosing the strike price can involve some strategy, especially if the strikes are only 1 or 2.5 points apart. You don’t want to go too far out of the money or the return will be next to nothing. Too close to the money and you risk the option moving into the money.
It’s important that the strike for your out-of-the-money put should be close to a significant support level. Ideally, the strike should be below the support to help keep your sold put out of the money. We like the 50-day moving average, a trend-line connecting a stock’s recent lows, or a strike with a lot of put open interest.
In the event that you are assigned and take possession of the shares after the put moves slightly in the money near expiration, you could benefit from an immediate technical rebound in the stock.