Selling Puts Too Far Out-of-the-Money

A stock trades at $50 and you sell the $40 put for $0.30. It feels safe, the strike is 20% below current price, there's no way you'll get assigned. Except you just committed $4,000 in capital for 30 days to earn $30. That's a 0.75% monthly return, 9% annualized, on a strategy that could easily generate 15-20%. You've traded meaningful income for false safety, turning an effective strategy into a capital-wasting exercise that barely beats money market funds.

TL;DR

• Far OTM puts earn pennies: The deeper out-of-the-money you go, the lower the premium relative to capital committed
• Capital efficiency collapses: Tying up $5,000 to earn $50 is a poor use of your money
• You'll rarely get assigned: Which sounds good until you realize that means you never actually buy the stocks you want
• Fear drives poor strikes: Selling far OTM reflects assignment anxiety, not sound strategy
• At-the-money or slightly OTM is ideal: Maximum premium collection while maintaining realistic entry prices

The Illusion of Safety

Why Investors Go Far OTM

Fear of assignment: "I don't want to get stuck with shares, so I'll sell deep OTM puts that'll never assign."

Misunderstanding the goal: They think cash-secured puts are about collecting premium and never owning stock. But the strategy is actually "get paid to place limit orders on stocks I want to own."

Low risk tolerance: Deep OTM puts feel "safer" because assignment probability is 5-10%, not 30-50%.

Bad advice: Some options educators teach "sell puts way below the stock to capture easy money." This maximizes safety and minimizes returns.

The problem: when you optimize for never getting assigned, you've turned a stock acquisition strategy into a low-yield cash drag.

The Math of Far OTM Puts

Let's compare three scenarios with the same $50 stock:

Scenario A: Far OTM (Conservative/Inefficient)

• Stock price: $50
• Strike: $40 (20% OTM)
• Premium: $0.40 per share ($40 per contract)
• Capital secured: $4,000
• Monthly return: 1% ($40 / $4,000)
• Annual return if repeated: ~12%
• Assignment probability: 5-8%

Scenario B: At-the-Money (Optimal)

• Stock price: $50
• Strike: $50 (ATM)
• Premium: $2.00 per share ($200 per contract)
• Capital secured: $5,000
• Monthly return: 4% ($200 / $5,000)
• Annual return if repeated: ~48% (though assignments will reduce this)
• Assignment probability: 40-50%

Scenario C: Slightly OTM (Sweet Spot)

• Stock price: $50
• Strike: $47 (6% OTM)
• Premium: $1.30 per share ($130 per contract)
• Capital secured: $4,700
• Monthly return: 2.8% ($130 / $4,700)
• Annual return if repeated: ~34% (with some assignments)
• Assignment probability: 25-30%

Scenario C wins. You're earning 2-3x what Scenario A generates, at a strike price that's still reasonable based on valuation. Yes, you'll get assigned occasionally, but that's the point.

Why Capital Efficiency Matters

Every dollar you commit to a cash-secured put is a dollar that can't be deployed elsewhere. When you tie up $4,000 to earn $40, you're using capital inefficiently.

Opportunity Cost Example

You have $40,000 to deploy via cash-secured puts. Two choices:

Option 1: Far OTM Puts
Sell 10 puts at $40 strike, $40 premium each
Monthly income: $400
Annual income: ~$4,800 (12%)
Assignments: Maybe 1 per year

Option 2: Slightly OTM Puts
Sell 8 puts at $47 strike, $130 premium each
Monthly income: $1,040
Annual income: ~$12,480 (31%)
Assignments: 2-3 per year (which is fine if you want to own these stocks)

Same capital. 2.6x higher income. The only difference is you're willing to actually buy stocks at fair prices instead of hiding 20% below market.

When Far OTM Makes Sense (Rarely)

There are specific situations where deep OTM puts work:

1. Earnings Protection

You want to sell puts but earnings are in two weeks. IV is elevated. You can collect decent premium on deep OTM strikes that protect you if earnings disappoint badly.

Example: $50 stock, earnings in 10 days
Sell $42 put for $0.80 (elevated IV)
If earnings disappoint and stock gaps to $44, you're safe
If earnings go well, you keep premium

This is situational, not a permanent strategy.

2. Extremely Overvalued Markets

When P/E ratios are in the 90th percentile historically and you believe a correction is likely but want some income, far OTM puts on quality stocks let you wait for a crash while earning something.

Example: Market P/E is 28 (historically high)
Sell $40 puts on $52 stocks (23% below)
You're betting on a significant correction
If it comes, you buy wonderful companies at crisis prices
If it doesn't, you collect modest premium until valuations normalize

This is market-timing disguised as income strategy. Risky and often wrong.

3. Maximum Cash Preservation

You're holding 80% cash waiting for a specific opportunity. You sell deep OTM puts to earn slightly more than T-bills while preserving full liquidity.

This makes sense if the "opportunity" is time-sensitive (e.g., buying a house, starting a business). But if you're just waiting to invest, you're wasting time and capital.

The Psychological Trap of Safety

Far OTM puts feel comfortable. You collect premiums month after month. You never get assigned. Your account shows consistent small gains.

But you're not actually building a stock portfolio. You're running a low-yield cash management strategy that requires active management.

Compare to an investor who sells slightly OTM or ATM puts:

• They collect 2-4x higher premiums
• They occasionally get assigned at fair prices
• Over 2-3 years, they've accumulated 8-10 quality companies
• Their portfolio of owned stocks likely appreciated 30-50%
• Their total returns (premiums + stock appreciation) crushed the far OTM approach

The "safety" of never getting assigned is actually the risk of never building wealth.

Finding the Sweet Spot

The optimal strike balances income and acquisition goals:

Start with Intrinsic Value

Use Wall St Yardie to calculate fair value. Let's say a stock trades at $50 but you estimate intrinsic value at $65.

Fair entry range: $45-50 (based on margin of safety)

Now sell puts at strikes within this range. If assigned, you're buying at or below fair value.

Good strikes:

• $48 put: 4% below market, well below intrinsic value
• $47 put: 6% below market, strong margin of safety
• $50 put: At market, but still 23% below intrinsic value

Bad strike:

• $40 put: 20% below market, only collecting $0.40 premium
• You've wasted the opportunity to buy at $45-48 where value is clear

Target 2-4% Monthly Premium Yield

A rough guideline: aim for puts that generate 2-4% monthly return on capital secured.

$4,700 secured for $130 premium = 2.8% monthly
This is sustainable and aligns with reasonable strike selection.

$4,000 secured for $40 premium = 1% monthly
Too low. You're leaving money on the table.

$5,000 secured for $250 premium = 5% monthly
Too aggressive. You're probably selling at strikes that are overvalued or on volatile, low-quality stocks.

Accept 20-30% Assignment Probability

If your puts have less than 15% chance of assignment, they're probably too far OTM. If they're over 50%, you're being too aggressive or selling through earnings.

The sweet spot: 20-35% assignment probability at time of sale. This ensures meaningful premium while maintaining reasonable entry prices based on fundamental analysis.

Practical Implementation

Before Selling Any Put

Question 1: Would I happily buy 100 shares at this strike price today?
If no, don't sell the put.

Question 2: Does this strike offer at least 2% monthly premium?
If no, it's too far OTM. Move closer to the money or skip this stock.

Question 3: Is the strike at or below my calculated fair value?
If no, I'm committing to overpay. Find a better entry or different stock.

Question 4: Am I selling this strike because it's safe or because it's smart?
If it's just safety, I'm wasting capital. Find the courage to sell closer to the money on quality companies.

After You Get Assigned

If you're regularly selling far OTM puts and never getting assigned, you've discovered a problem: you're not actually building a portfolio.

Fix this by:

• Moving strikes closer to current price
• Focusing on stocks you genuinely want to own
• Accepting that assignment is part of the strategy, not a failure
• Reading about why assignment shouldn't cause panic

What Could Go Wrong?

Overcorrecting to ATM: You read this article and immediately start selling only at-the-money puts. You get assigned on everything within two months. Now you're 100% invested with no cash for opportunities.

Mitigation: Move gradually. Start with slightly OTM (5-8% below market). Build comfort with assignments before going ATM regularly.

Chasing premium blindly: You focus only on premium yield, selling puts on any stock that pays 3-4% monthly. You ignore quality. Assignments bury you in mediocre companies.

Mitigation: Quality first, always. Only sell puts on wonderful companies you'd hold 5+ years. Let premium be secondary.

Selling through earnings: You move closer to the money and forget about earnings risk. You get assigned at $48 right before an earnings gap to $40.

Mitigation: Always close or roll puts at least 5-7 days before scheduled earnings, regardless of strike.

Ignoring valuation: You sell $48 puts because the premium is good, but intrinsic value is only $45. Assignment at $48 leaves you overpaying by $3 per share.

Mitigation: Always calculate fair value first. Sell puts only at strikes below that number.

Capital commitment creep: You start selling closer to the money. Premiums are bigger. You sell more puts. Suddenly 80% of capital is committed to potential assignments.

Mitigation: Maintain strict rules. Never commit more than 60% of portfolio to potential put assignments. Keep 30-40% cash regardless of how good premiums look.

Next Steps

• Audit current puts: For each open put, calculate premium as % of capital secured. If under 2% monthly, you're too far OTM.
• Calculate intrinsic value: Use valuation tools to determine fair value for stocks you're targeting. Set strikes based on this, not arbitrary percentages.
• Review historical assignments: How often have you been assigned in the past year? If under 10%, you're likely too conservative with strikes.
• Set minimum premium thresholds: Decide your floor (e.g., 2.5% monthly). Don't sell puts that don't meet this.
• Study cash-secured put mechanics: Understand how to select strikes that balance income and acquisition goals.
• Paper trade at-the-money puts: Practice selling ATM puts on quality stocks to build comfort with higher assignment probability.
• Build strike selection rules: Create a checklist for choosing strikes based on intrinsic value, premium yield, and assignment probability.
• Track capital efficiency: Measure your returns per dollar committed. Compare far OTM results to moderately OTM results over 6 months.

Remember: the goal of cash-secured puts is to buy wonderful companies at discount prices while getting paid to wait. If you're never getting assigned, you're not buying companies. You're just running a low-yield bond proxy. Keep the riddim steady, move your strikes to where value lives, and let assignments work for you instead of avoiding them out of fear.