To determine the right strike price when writing an option is an art in itself. You sell a PUT of a certain strike price if you are convinced that stock will not go below that strike price or if it goes, you are OK to own it. Example, AAPL is close to its 200DMA (159). This is a great support level. Many believe that AAPL should bounce hard from this level and there is very little chance it will breakdown below that. Then they would sell 160 PUT and collect a premium. Lot of MMs, would do a dual trade. Sell 160 PUT, collect premium and buy a call with the same premium. The idea is minimum or (zero) money out of pocket! Caution: Lot of Smart Investors sold 165 PUT and bought 170 CALL on AAPL. This was a great trade and those Investors were feeling very smart in AH yesterday when AAPL jumped to 173. But, today they got massacred as AAPL reeled down to 160. So now their buying point is 165 and they are sincerely hoping AAPL does not breakdown below 160. If it does, they will end up in a miserable situation as 160 would now become a major resistance and AAPL would take a long time to climb that. Well, professional option trader have a plan B and will set up various strategies like a Butterfly (you can google) but for Beginners, you should seriously consider covering and cutting your losses if the trade goes against you. Similarly, you can keep selling CALLs (preferably covered, I never do naked) and keep collecting premiums. Example I sold NVDA 245 CALLs against my equity for 5 bucks, limiting my gains to 250. I did that because I thought NVDA would not go beyond that and if it does, I am satisfied with my profits. Long story short, most important is the correct strike price and that is based on lot of factors. Hope this is helpful.
