Why should you not simply chase high premiums?
I‘m quite new to this and still trying to figure if getting deeper into options will be worth it for me. I’d be really thankful if some of you wanted to comment on my thoughts.
When people discussed about options trading, I read quite often (especially in the context of CSPs) that getting seduced by high premiums for selling CSPs while neglecting fundamentals of the underlying is a common mistake. What is your opinion on that?
E.g.: if I see a random stock where I can sell a 2 weeks atm CSP with 5% premium, I only lose if the underlying drops by > 5% in these 2 weeks. Since we are talking about a random
stock here, chances are not too high for this drop to happen, so we should in average make profit with this trade. I understand that your profit is limited with CSPs while you still have the risk of major drawdowns. But beyond a certain point, the premium has to be high enough to make you want to forgo potential additional gains and take some risk. Buyers of diversified ETFs always buy „random“ stocks while accepting the risk of drawdowns and without expecting 5% in 2 weeks.
And: if the abovementionned trade is not profitable longterm, then that would mean that high premiums on CSPs (let’s still take 5% for 2 weeks as an example) would be a very reliable bearish indicator, which seems way less likely to me.