What Is the Primary Risk When Selling Deep OTM Options to Collect Premium? ▴ Learn

What Is the Primary Risk When Selling Deep OTM Options to Collect Premium?

The primary risk when selling deep Out-of-the-Money (OTM) options is the "Black Swan" event risk, or "tail risk." While the probability of a deep OTM option expiring In-the-Money is low, the potential loss if the underlying asset (like Bitcoin) experiences a massive, unexpected price move is theoretically unlimited for a short call and substantial for a short put. The small premium collected does not adequately compensate for this low-probability, high-impact event.

This risk is compounded by the low Delta, which requires massive rebalancing if the option suddenly moves ITM.

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