Deadline for expiration
How to choose the expiration period when selling options? There are different points of view on this question.:
1. sell options as far away as possible, motivating this with their greater premium and, respectively, the opportunity to get more potential profit from the transaction
2. sell options as short as possible (up to several days before expiration), focusing on the fact, that the influence of time on options near the expiry date will be stronger and, respectively, they will get cheaper faster.
Let's compare two sold OTM options with a strike 16 000 on futures on Sberbank shares with execution in October (behind 40 days before expiration - short option) and December (behind 96 days before expiration - long-term option).
Let's admit, price BA - 15 687 rubles.
At growth of the underlying asset we have an obvious risk, the value of our options on the market will increase, because. the likelihood of the buyer exercising these options will increase.
And, the stronger this increase in value will be, the more our loss will be.
The figure shows the change in the premium of the October and December options with the same growth of the futures in % from the initial cost of the option.
Obviously, that the loss on the shorter option (October) grows almost in 2 times faster, than for the long term (December) with the same change in the underlying asset (Sberbank stock futures). In this way, when selling a shorter option, we always have a greater risk when the BA moves against our position, than with the long-term option.
The greater the risk, the more the reward should be. Remind, that when selling options, time is on our side. Every day, our sold option loses part of its time value and brings us a profit..
Let's compare, how much we will earn on the options we have chosen due to the influence of time.
A shorter-term option depreciates faster and brings us more, than in 2 times more profit from temporary decay compared to long-term. At the same time, as the expiration date approaches, this difference in profit becomes stronger and stronger.. Ie. when selling a shorter option, the effect of the temporary decay on the option is much stronger, than for a longer-term option, and our profit per unit of time will be greater.
The general conclusion is as follows.
At selling a longer-term option we have less risk on the underlying asset, but this position will be less profitable.
At selling a shorter-term option we have a greater negative impact of the underlying asset on the position (greater risk), but the option will fall in price faster, thereby, bringing us more income for each day of holding a position.
What term to choose?
I can give the following recommendations:
1. Selling a very short OTM option (with a life span of several days before expiration) does not justify itself due to the low cost of these options and extremely low capital efficiency. To make some meaningful profit, you need to sell a lot, and this greatly increases the GO in position, and the risks too.
Selling in this variant more expensive ATM options too risky, despite the maximum rate of loss of time value of the option and, respectively, the highest profit per unit of time.
Therefore, I would not recommend ultra-short options to sell..
2. Sale of long-term options (with expiration through 3 month or more) due to the very small time decay, it doesn't make sense for me. There are still risks for the position, and the reward for risk is too small. Yes, the premium of these options is high, but also time for that, so that the BA price goes against your position also more.
3. I recommend selling options with a term to expiration of approximately three weeks - one and a half months (can be guided by about 30 days). Time decay is already slowly beginning to intensify, there are options for neutralizing risks and quite good ones. The return / risk ratio on invested capital in this option is optimal.
But this is my approach. It also depends on the degree of your attitude to risk and the aggressiveness of your trading..
