>>Finally, could you narrow down whether it is better to play ITM or ATM options in regards risk/reward?<<
I think it depends on the play. On the DNDN idea the other day. The 5's gave a great return with good downside protection. However, the 7.50's did not give quite as good downside, but allowed you to partipate on a good amount of upside in exchange for less protection.
ADS for example, I split between ATM and ITM. I do favor ITM at between 4-5%. I think if one gets too greedy, always swinging for the fences, you are going to have trouble showing good consistent returns.
I do tend to go after stocks that have corrected. Some, and more recently many, are former high flyers. Of course the more volatility, the higher the premiums. I have no problem with stocks being called away. I think my hedge strategy allows me to be a bit more aggressive in a down market.
What I look for is a sectors I think I good upside. then look at stocks with projected growth rates above 20%, with PE's below 20. (PEG of 1 or less)If I have that, I feel I am buying value, and in the long term I will gain.
The YGE example is a good one. Would much rather be taken out for 7.4% gain if taken out at 17.50, or sell OTM 20's for 5.7% if the stock stays here? The first gives me downside protection to 16.14. My upside is capped at 7.4%. The second choice gives me downside protection just 17.34, but the upside is a possible 14.5% if the stock gains 8.8% here to $20. With what I think about YGE, I think I would go for the later. If the stock goes lower, my new cost basis is 17.34. Next month I sell again. Hopefully, if I still believe in the stock, after a month or two I make a profit or get out with a breakeven.