Obviously you are very successful with ATM selling, I'm not criticizing your method. What I'm trying to understand is how you make up the losses that you "lock in" when you are wrong (because again statistically you will be wrong much more often with ATM than DOTM). Because that's the key difference is if ATM is wrong, you lose the theta advantage. But if DOTM is wrong, you have Theta working for you every day that the market doesn't keep going against you.
You keep talking about theta - but do you understand gamma? When you're short OTM options about the only thing you've got going for you is the low probability of them ending ITM, *in the normal case*. However, as things go wrong in the trade and the strike *approaches* being ATM (or worse ITM), then gamma and delta start growing exponentially. On top of that, if these are puts, and vol/IV also starts increasing due to panic selling, you get the added bonus of vega crapping right on your face (remember, you're no longer OTM, you're near ATM or ATM). In fact, the only respite you get during this whole ordeal is when it passes ATM and heads ITM, at which point you'll still be getting punched in the face but those punches will be decreasing in strength because gamma is decreasing and delta *growth* is slowing (it doesn't mean it is decreasing) as it approaches 1. You're still going to get smoked and it's highly unlikely you'll be able to cover the parabolic growth in value of those short "sure thing" OTM options.
So you figure you'll try and hedge it somehow right? Well turns out you had to juice things up a bit by selling 100 of these things just to make a solid return. Now it's moved against you and what was once 4 delta is now 40 delta and you've got to eat it and hedge off the other side with long options (and you will *pay up* for any IV increase that happened), or close it out entirely (still eating it), or hedge with the underlying. Good luck hedging with the underlying where you now need 4,000 outright shares (in a typical SPY case) to cover your 100*40 delta short options. Take something like SPY and that's 800k$ worth of outright, or ES where you're gonna need a 40 lot to cover this or around 200k$ in margin just to stop the bleeding (and btw, those margin reqs will probably be severely increased by the exchange just when you need it least!).
Now take Mav who chose to instead sell 10 of these contracts ATM for an similar return in premium. From the start he was already on the right side of gamma (at the very *peak*) and if the trade goes wrong its not going to get more wrong and *more* painful as it approaches ATM - because it's *already* ATM, it's just going to be a losing trade as it goes more ITM which he can choose to manage, hedge with the underlying (which will be a heck of a lot more doable given there's not 100 of these grenades to worry about). He's of course exposed to volatility/IV, but so is OTM guy. Delta is always a factor but for Mav, gamma is decreasing (ATM->ITM), whereas for OTM guy it is increasing (OTM->ATM). Heck of a lot easier to herd 10 well behaved dogs than it is to herd 100 pissed off feral cats.
Just look at the some of the "everything is awesome, nothing to worry about" cases vs -5%-10% move w/ +30% IV jump cases (caveat, I took quotes off hours and just took the mid):
-10 ATM 2050 puts (using mid price [30], no IV bump):
-10 ATM 2050 puts (using mid price [30], +30% IV bump):
-100 OTM 1850 puts (using mid price [3.45], no IV bump):
-100 OTM 1850 puts (using mid price [3.45], +30% IV bump):
If you instead say "yeah but how often do +30% IV jumps even happen, it's 'rare'":
NO FREE MONEY.
