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No. of Recommendations: 3
<<Could you explain why you chose those strike prices?>>

I want positive theta (i.e., position benefits from time decay), so the short put strike of my spread needs to be out-of-the-money (OTM). With WFMI trading at $45.50, the first OTM strike is $45.

I choose the first OTM strike, rather than a more distant OTM strike, because I want to bring in at least 40% of the distance between the strikes in premium. A 40% premium means that I have a 60% chance of making money. I like to keep my risk-reward ratio somewhere between 40%-60%. This allows me to win at least half the time and still bring in substantial premium. For more details on the probability of profit in option spreads, see my articles:

http://www.fool.com/investing/options/2006/10/24/be-your-own-casino-an-options-tutorial.aspx

http://www.fool.com/investing/options/2006/10/25/be-your-own-casino-part-2.aspx

Jim
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