When is an option premium "good"? Here's how to tell

Many investors are drawn to the idea of selling options to generate income. The premise is simple: collect a premium upfront and potentially keep it if the option expires worthless. But not all premiums are created equal. A €2 credit may sound attractive on paper, but is it really worth the risk?

In this article, we'll unpack what it really means for an option to offer a "good" premium—and how to evaluate it in the context of risk, capital efficiency, and probability of success. Whether you're selling puts, covered calls, or vertical spreads, this guide will help you filter out the noise and focus on quality setups.

Important note: the strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.

What is a "good" premium?

In short, a good option premium isn’t just about how much money you collect upfront. It’s about how much you're paid relative to the risk you take, the capital it consumes, and your chances of keeping that premium.

In other words: good option sales are risk-adjusted, capital-efficient, and repeatable.

Characteristics of quality premiums

Let’s go through what separates a solid opportunity from one that’s all shine and no substance.

First, evaluate the yield relative to capital at risk. For cash-secured puts or covered calls, a premium that generates 1–2% per 30 days on the collateral is a decent baseline. This can rise to 2–4% around earnings or other high-volatility events. For defined-risk trades like vertical credit spreads, aim to collect at least a third of the width of the spread. If the spread is €3 wide, you should ideally collect €1 or more in credit.

Second, look at the implied volatility environment. Premiums tend to be more attractive when implied volatility (IV) is high relative to recent history. IV Rank above 30 or 50 suggests you’re selling when options are inflated. Bonus points if you’re taking advantage of favorable skew—like selling puts when markets are jittery or calls during a short squeeze.

Next, consider probability and breakevens. A good trade setup typically has a relatively high chance of success. Although probability of profit (POP) is not always explicitly available, a practical proxy is the delta of the option. For undefined-risk trades like short puts or covered calls, selling options with a delta around 15–25 typically implies a 75–85% chance of expiring out of the money. For defined-risk spreads, using short strikes with a delta in the 25–35 range generally reflects a 60–70% probability of retaining most or all of the premium. Your breakeven should ideally lie outside the expected move of the underlying for that expiry cycle.

Time is another factor. Most premium sellers gravitate toward the 30–45 days to expiry range. That’s where time decay (theta) begins to accelerate, while gamma risk—the sensitivity of an option’s delta to price changes in the underlying—remains manageable. Gamma tends to rise sharply as expiry nears, making positions more reactive to small moves in the underlying. In the final week, even a modest swing can rapidly flip your delta exposure and lead to significant losses if not closely managed. The 30–45 day zone strikes a practical balance: you earn meaningful decay without being overly exposed to these sudden shifts. Shorter-term trades can work too, but they require closer monitoring and faster decision-making.

Then, there’s liquidity. The bid–ask spread should be tight, especially for lower-priced options. A general rule of thumb is to avoid trades where the spread eats up more than 1% of the premium—or more than €0.05 when premiums are under €1. Open interest of at least 500 contracts usually indicates there’s enough participation to get in and out efficiently.

Finally, don’t forget about portfolio fit. Even the best-looking trade on paper can be a poor choice if it doesn’t match your risk exposure, margin capacity, or directional bias. For example, selling a put on a tech stock when you’re already heavily invested in that sector could increase your concentration risk. Or opening a bullish vertical spread might not make sense if the rest of your portfolio is already tilted toward aggressive growth. Look for opportunities that improve your portfolio’s overall Greek profile—adding theta income or offsetting delta and vega concentrations.

Common guidelines

Here are a few reference points many traders use:

• Cash-secured puts and covered calls: 1–2% return per 30 days is a strong baseline.
• Vertical spreads: aim to collect 33% or more of the spread width.
• Diagonal call spreads or covered calls against long stock: the short leg should cover at least 50–80% of the theta decay of the long leg.
• Strangles or condors: the total premium should make it likely that both breakevens sit outside the expected move.

The right question to ask

Rather than simply asking, “Is this a high premium?”, ask:

Am I being paid enough for the risk and capital this trade consumes?

If the answer is yes—and you have a clear exit or adjustment plan—the trade likely has merit.

Stress-testing your idea

A few quick checks can go a long way. Ask yourself:

• What happens if implied volatility drops sharply?
• What if the underlying gaps 1.5x the expected move?
• Can I still manage the trade or defend it?

If you’re still comfortable, you might have found yourself a high-quality setup.

Final thoughts

Smart premium sellers aren’t just chasing numbers. They’re evaluating every trade on multiple levels: risk, capital efficiency, odds of success, and fit within their broader plan. They also pay attention to how changing market conditions—like shifts in volatility, earnings announcements, or macro events—can alter the risk-reward of a position even after entry. Consistent profitability in options selling comes less from finding big winners and more from avoiding poor trades and managing losers efficiently. That means maintaining discipline with position sizing, keeping sufficient buying power for adjustments, and knowing when to take profits early when time decay has done its work.

When you hear that a premium is “good,” now you have the tools to decide whether that claim holds water—and the awareness to recognise when the same premium might not be so good tomorrow.