All traders eventually realize there is a positive drift for equities. We want to take advantage of Theta (time decay) by selling option premium, especially naked puts. Some tastylive viewers have written in asking, "is it a viable strategy to sell longer duration puts?"
The study was conducted in SPY (S&P 500 ETF) from 2005 to present. We sold 1 Standard Deviation (SD) Puts with a 16 Delta and then compared options with different durations. We used option cycles from 45 to 365 DTEs. All trades were held to expiration.
A graph of the price of the one SD Short Puts in SPY from 45 DTE to 365 DTE was displayed. The graph showed that the longer duration puts were more expensive and yielded a higher average P/L in absolute terms. A second graph of the annualized P/L versus days to expiration was displayed. This graph showed that the shorter-term options (45 DTE) had the highest annualized potential P/L based on the average P/L per day. The percentage of profitable trades was lower as well in the longer term cycles due to the uncertainty over longer time frames.
For more on various option time frames see:
Market Measures from December 28th, 2012: "Days to Expiration"
Market Measures from May 1st, 2015: "Days to Expiration | Time Frames"
Market Measures from May 29th, 2015: "Straddles | Various Time Frames"
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the important takeaways and the study results comparing shorting longer dated puts to ones closest to 45 DTE.
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