Hi, As a paper trader I am working on different systems and was wondering if you guys mind commenting on this idea: It is clear that close-to-the-money options trade at higher premiums than further away options. Therefore I was wondering if it would make sense to trade the premium spread. I would like to have the major part of the time decay to work in my favor and collect as much of the premium spread as possible. Example GE April 2011 options: Share price: $20.82 Option #1: Strike: 20 Price: 1.33 Intrinsic Value: 0.82 Premium: 0.51 Option #2: Strike: 19 Price: 2.13 Intrinsic Value: 1.82 Premium: 0.31 I would be buying #2 and selling #1 and watch the share price as a hawk. Scenario 1: Share price increases: If the shares rise in value the intrinsic value of both #1 and #2 would increase equally but the premium of #1 would decrease the most, resulting in a profit. Time decay would hit #1 harder due to the higher premium. Scenario 2: Share price decrease: Intrinsic value of both #1 and #2 would decrease equally, the premium of #1 would increase the most resulting in a loss. System will need to liquidate the spread when share price hits $20 to avoid loss of intrinsic value. Time decay works in my favor. Scenario 3: Share price stays the same: Time decay eats away the premiums resulting in a 20 cent profit. Scenario 4: Share price opens sharply down, and stays low until expire: No time to act, might lose the entire spread of 80 cents. (Looking for a way to hedge this risk). Basically in this system the key is to find an option with the highest possible premium while not too close to intrinsic value. If a mispricing (to the high side) could be identified on the sold option the down side would be limited further. Also, as a general rule I would like the time decay to work in my favor. While there are probably still much improvement needed for the âsystemâ to be consistent profitable, I guess my questions to the experienced traders are: Are my scenario assumptions correct and do you have ideas to improvements/hedging of risk?