Why Delta Matters for Strike Selection
Why Delta Matters for Strike Selection
When you sell a cash-secured put or covered call, the strike price you choose is the single biggest lever you control. A strike too close to the current price collects fat premium but gets breached constantly. A strike too far away is safe but barely worth the capital commitment. Delta gives you a standardized way to compare strikes across any stock and any expiration.
Unlike picking a fixed dollar amount below the stock price ("I always sell $5 OTM"), using delta normalizes your strike selection. A $5 OTM put on a $50 stock is 10% away. A $5 OTM put on a $500 stock is only 1% away. Delta accounts for the stock price, implied volatility, and time to expiration all at once.
- +"Sell the $5 OTM put" on every stock
- +Inconsistent risk across different prices
- +Ignores implied volatility entirely
- +A $5 move means different things for AAPL vs. F
- –"Sell the .25 delta put" on every stock
- –Consistent probability of success
- –Automatically adjusts for IV environment
- –Same risk profile whether the stock is $20 or $200
The three delta targets that matter most for wheel traders are .20, .25, and .30. Each represents a distinct risk/reward posture. In the next three lessons we will break down exactly when and why you would choose each one.
- •Delta is your best proxy for probability of finishing ITM
- •Delta-based strike selection normalizes risk across stocks and IV environments
- •The three key delta targets for premium sellers are .20, .25, and .30
- •Lower absolute delta = farther OTM = higher probability of profit but less premium
A short put has a delta of -.22. What is the approximate probability it expires OTM (you keep the premium)?