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OTM vs ITM cash-secured puts: premium, or a discount?
An out-of-the-money put pays less and buys the stock cheaper, if it buys at all. An in-the-money put pays more and almost always buys. Which one fits depends on how much you want the shares.
The short answer
An OTM (out-of-the-money) put has a strike below the stock price. You collect a small premium and, if assigned, buy the stock at a discount to today. An ITM (in-the-money) put has a strike above the stock price. You collect a big premium, most of it the gap between the strike and the price, and you'll almost surely be assigned.
In the wheel strategy, OTM puts are the default. ITM puts are for when you want the shares now and would rather be paid a little to buy them than place a market order.
What you're really buying
A Put option you sell is a promise to buy 100 shares at the strike. The premium lowers your cost.
- OTM $45 put on a $50 stock, sold for $1.00: if assigned, you own at $44. That's a $6 discount to today.
- ITM $55 put on a $50 stock, sold for $6.00 ($5 intrinsic + $1 extrinsic): if assigned, you own at $49. That's a $1 discount to today.
The ITM put's big premium mostly cancels out. You agreed to pay $55 for a $50 stock, and the market paid you $5 of that back up front. Only the extra $1 is yours. See intrinsic vs extrinsic value for sellers.
Side by side
| OTM put ($45 on a $50 stock) | ITM put ($55 on a $50 stock) | |
|---|---|---|
| Premium | Small, all extrinsic (about $1.00) | Big, mostly intrinsic (about $6.00) |
| Odds of assignment | Lower; the stock must fall $5 | High; the stock must rise $5 to avoid it |
| Price you'd own at | $44, a real discount | $49, about today's price |
| Decisions per year | About 12 monthly; many expire, you re-sell | About 12; most end in shares, then calls |
| Spread paid | Once per trade | Once; ITM spreads are often wider |
| Cash set aside | $4,500 | $5,500 |
| What you give up | The shares, if the stock never dips | The discount; you're buying near today's price |
A worked example (an illustration, not a trade idea)
Made-up stock XYZ trades at $50.
- OTM: sell a 30-day $45 put for $1.00. Cash set aside: $4,500.
- ITM: sell a 30-day $55 put for $6.00. Cash set aside: $5,500.
| XYZ at expiry | OTM $45 put | ITM $55 put |
|---|---|---|
| $35 | Assigned at $45: −$1,000 + $100 = −$900 | Assigned at $55: −$2,000 + $600 = −$1,400 |
| $40 | Assigned: −$500 + $100 = −$400 | Assigned: −$1,500 + $600 = −$900 |
| $44 | Assigned: −$100 + $100 = $0 | Assigned: −$1,100 + $600 = −$500 |
| $49 | Expires: +$100 | Assigned: −$600 + $600 = $0 |
| $50 | Expires: +$100 | Assigned: −$500 + $600 = +$100 |
| $55 | Expires: +$100 | Expires or assigned at $55: +$100 (cap) |
| $65 | Expires: +$100 (cap); you never got the shares | Expires: +$100 (cap); no shares |
Three things to see.
- Both lose when the stock falls hard. The ITM put loses more, because it bought at a higher price. The premium cushion is bigger, but the price paid is $10 higher.
- The max gain is the same: $100. The ITM put's extra $500 of premium was never gain. It was the price gap.
- At $49, the OTM seller keeps $100 and no shares. The ITM seller owns shares at break-even. If you wanted the shares, the ITM put got them. If you wanted the premium, it didn't help.
An ITM put is a way to buy the stock at about today's price and get paid a dollar for the month of waiting. If you'd just buy the shares today, it's a reasonable alternative. If you wanted a discount, it isn't one.
When an ITM put fits
- You've decided you want the shares and you're fine owning at around today's price.
- You'd rather collect the extrinsic value than place a market order and get nothing.
- You understand that if the stock rallies, you keep only the $100 and miss the move, same as the OTM put.
Compare this with simply buying the stock in sell a put or just buy the stock.
When an OTM put fits
- You'd like the stock, but only at a lower price.
- You're happy if the put expires and you keep the premium.
- You want the cash set aside to be smaller, which it is: $4,500 instead of $5,500.
How far OTM is its own decision. See cash-secured put strike selection and 20-delta vs 30-delta puts.
Pick this if, pick that if
Pick OTM if:
- You want a real discount if assigned.
- You're fine not getting the shares at all.
- You want the premium to be all extrinsic value: money you actually earn.
Pick ITM if:
- You want the shares now, at about today's price.
- You'd buy them with a market order otherwise.
- You accept that the big premium is mostly the strike gap handed back.
Pick neither if:
- You don't want to own the stock. Every put is a promise to buy. See the cash-secured put explained.
Questions
Should I sell puts in the money or out of the money?
Out of the money if you want a discount and are fine with no shares. In the money if you want the shares now and would rather collect a little extrinsic value than buy at market. Most wheel sellers use OTM.
Why is the premium on an ITM put so high?
Most of it is intrinsic value: the strike minus the stock price. A $55 put on a $50 stock has $5 built in. That part isn't gain; it's the extra you agreed to pay for the shares, returned up front.
Can I lose more on an ITM put than an OTM put?
Yes. If the stock falls hard, the ITM seller bought at a higher strike, so the loss on the shares is bigger. The larger premium cushions some of it, not all.
What's the max gain on an ITM cash-secured put?
The extrinsic value only. In the example, $100 on a $6.00 premium. The other $500 was the gap between the strike and the stock price.
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