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Premium as a percent of the cash set aside: the yardstick that's hard to fool

The simplest honest way to compare two short options is the premium divided by the cash it ties up. It puts a $20 stock and a $95 stock on the same scale. It still needs one partner number, the cushion, before it means much.

Options guide · 8-minute read · Updated 2026-10-27

The short answer

Divide the premium you collect by the cash the trade ties up. For a cash-secured put, that's the strike × 100. For a Covered call, it's the value of your 100 shares.

A $45 put sold for $1.00 ties up $4,500 and collects $100: 2.2% of the cash for that trade. That number lets you compare trades of any size. What it doesn't tell you is how close the risk sits. For that, pair it with the cushion: how far the stock can fall before you lose money.

Why dollars alone mislead

A $1.50 premium sounds better than $1.00. But if the $1.50 trade ties up $9,500 and the $1.00 trade ties up $4,500, the smaller premium is paying more for each dollar at risk.

Dividing by the cash set aside fixes that. It answers one plain question: how much am I paid for each dollar I've promised?

How to work it out

• Cash-secured put: premium ÷ strike. ($1.00 ÷ $45 = 2.2%.)
• Covered call: premium ÷ today's share price. ($1.00 ÷ $50 = 2.0%.)
• Per day, to compare lengths: divide by the days to expiry. Or scale to 30 days: percent × 30 ÷ days.

Some sellers use their own cost per share for covered calls instead of today's price. Pick one way and use it every time, so your journal stays comparable.

A worked example: three puts side by side (an illustration, not a trade idea)

Three made-up stocks, three puts. Round numbers.

Read across. Trade B collects the most dollars and pays the least per dollar of cash. Its cushion is also the thinnest. Trades A and C have the same cushion, and once C is scaled to 30 days its premium is close to A's.

The losing case for each

Same three trades. At expiry, each stock has fallen 25% from where it started.

Also notice Trade C. It's described as jumpy. A 25% fall in 45 days is far more likely for a stock like that than for a calm one. Its 3.0% looks best on the first line for the same reason. High premium ÷ cash usually means high Implied volatility, and high IV means bigger expected moves.

Pair it with the cushion

The two numbers work as a pair:

There's no row with high pay, a wide cushion and a calm stock. If you think you've found one, check the earnings date. Why high premium is a warning covers the usual reasons.

Covered calls use the same yardstick

You own 100 shares of XYZ at $50, worth $5,000. You sell a 30-day $55 call for $1.00 and collect $100. Premium ÷ share value = 2.0%.

Here the "cushion" is the premium itself: your break-even on the shares drops from $50 to $49. That's a 2% cushion against a fall. The rest of the downside is the stock's. If XYZ falls to $40, you're at −$900 even with the premium.

How to use it in the wheel

In the wheel strategy, this yardstick helps you choose among stocks you'd already own. It shouldn't choose the stock for you.

1. Start with the list of stocks you'd hold. Only then compare premium ÷ cash among them.
2. Write the cushion next to every percent. A high percent with a thin cushion is a frequent-assignment trade.
3. Scale to the same length before comparing a 30-day trade with a 45-day one.
4. Check the dollar loss at −20% and −30%. That's the number your account will feel.

For turning this into a yearly figure, and why that misleads, see annualizing option premium. For how much cash to commit in the first place, see sizing math, the full obligation rule.

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