Accepting Exposure   • 215
$5.50 does not come along very often, so you should take advantage of it 
when you see it.
Of course, the absolute value of premium you will receive by writing 
(jargon that means selling an option) a short-term put is less than the ab-
solute value of the premium you will receive by writing a long-term one.
3 
As such, an investor must balance the effective buy price of the stock (the 
strike price of the option less the amount of premium to be received) in 
which he or she is investing in the short-put strategy with the percentage 
return he or she will receive if the put expires OTM.
I will talk more about effective buy price in the next section, but keep 
in mind that we would like to generate the highest percentage return pos-
sible and that this usually means choosing shorter-tenor options.
Strike Price Selection
In general, the best policy is to sell options at as close to the 50-delta [at-
the-money (ATM)] mark as one can because that is where time value for 
any option is at its absolute maximum. Our expectation is that the option’s 
time value will be worthless at expiration, and if that is indeed the case, 
we will be selling time value at its maximum and “closing” our time value 
position at zero—its minimum. In this way, we are obeying (in reverse 
order) the old investing maxim “Buy low, sell high. ” Selling ATM puts 
means that our effective buy price will be the strike price at which we sold 
less the amount of the premium we received. It goes without saying that 
an intelligent investor would not agree to accept the downside exposure 
to a stock if he or she were not prepared to buy the stock at the effective 
buy price.
Some people want to sell OTM puts, thereby making the effective buy 
price much lower than the present market price. This is an understandable 
impulse, but simply attempting to minimize the effective buy price means 
that you must ignore the other element of a successful short put strategy: 
maximizing the return generated. There are times when you might like to 
sell puts on a company but only at a lower strike price. Rather than accept-
ing a lower return for accepting that risk, I find that the best strategy is 
simply to wait awhile until the markets make a hiccup and knock down the 
price of the stock to your desired strike price.