The two basic options-selling strategies—Covered Call and Cash-Secured Put—provide investors a way to generate additional income by taking advantage of time-value decay in options. After you pick a specific options strategy, selecting an expiration date and strike price is key for a successful trade.

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What is an Option's Value?

When looking at stocks, it’s easy to find the current share price, but how can you tell what an options contract is worth? It’s simple—just check the market quotes. The premium paid by the buyers of a contract to the sellers is the option contract's equivalent of share price. It’s the price the contract is trading at. On a deeper level, an option's value is made of two parts: its intrinsic value and its time value.

• Intrinsic value reflects how far the option is in the money, measured by the payoff the buyer would receive if they exercised the option right now. Only in-the-money options have intrinsic value.
• Time value is any premium above intrinsic value before expiration This is essentially the amount investors are willing to pay for an option above its intrinsic value.

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Suppose the current price of ABC stock is $155 per share, and you plan to buy one ABC $150 21 Oct 22 Call at the ask price of $10.65. This call option is in the money, so it has intrinsic value of $5 ($155 market price minus $150 strike price) and has time value of $5.65 = ($10.65 premium minus $5 intrinsic value). Because out-of-the-money options do not have intrinsic value their premiums consist only of time value.

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How to Choose an Expiration Date

Unlike Stocks or ETFs, every option contract has a finite lifespan. It will expire at the expiration date stated in the contract. As the expiration date approaches, the time value of option decreases. This makes options decaying assets. The longer the contract has until expiration, the higher the time value will be, as there is more time for the stock to move above or below the strike price.

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For the Covered Call or Cash-Secured Put seller, the time decay effect works in their favor. Moreover, the time decay is not linear. As an option nears expiration, the time decay becomes more rapid with everything else held constant.

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Because short-term options have a higher time value per unit of time, they tend to be attractive to investors seeking higher annualized returns. But in practice, trading short-term options usually causes investors to spend more time following the market, monitoring positions, and making adjustments as necessary. You should carefully consider the amount of time you are willing and able to devote to an option-selling strategy.

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How to Choose a Strike Price

Selecting a strike price is also an important consideration for options sellers. Strike selection can differ depending on the seller’s goal and market outlook. There is no correct way to choose a strike price, but here are some tips to consider:

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• When choosing a strike price, examine the probability of the contract being OTM/ITM at expiration. Webull users can refer to the OTM% or ITM% to estimate the likelihood of an option being out of the money or in the money at expiration. These are mathematical estimates based on assumptions that don’t always play out in the real world, and they don’t guarantee predictive success, but they can be helpful indicators. Tap here to learn more about The Importance of Strike Selection When Selling Options.

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• Choose a strike you will be comfortable with if assigned. You should never hold an option contract controlling more stock than you are actually willing to buy or sell. Moreover, this is a crucial consideration for investors who use covered calls to target higher prices to sell their stock, and those who use cash-secured puts to target lower purchase prices.

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• Use support or resistance levels on the stock chart to aid in your selection. For example, a covered call seller will keep the full premium he or she received if the stock price hits a resistance level lower than the strike price, and holds steady until expiration.

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The Bottom Line

Options trading, like all investing, involves a balance of risk and reward. Understanding how strike price and expiration affect your odds of success will help you take smarter risks, and hopefully reap greater rewards.

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