We often receive questions why, since we are premium sellers, we don’t go further out in time and choose an options expiration with more days to expiration (DTE) than our typical 45 DTE as such options are more expensive and would bring in larger premiums. We feel that the best way to answer such a question is to show you our research. Does it make sense to sell longer DTE expirations or not?
Our study was conducted in the SPY (S&P 500 ETF) using data from 2005 to the present. We sold, on the first trading day of each month, the 1 Standard Deviation (SD) Strangle in three different expirations; closest to 45 DTE, 75 DTE and 110 DTE. All positions were closed 30 Calendar days after order entry.
An 11 year running P/L graph showed that the 45 DTE outperformed the longer DTE cycles. Tom posed a rhetorical question. “Why would I sell the option with $4.00 of premium when I could sell the option with $9.00 of premium? The answer is you actually make more money on the option with $4.00 of premium and a 45 DTE. You get paid for managing your account. Also the liquidity and Bid-Ask Spreads of the shorter term options are much tighter”.
For more information on Theta see:
Options Jive from July 31, 2015: “Theta”
Options Jive from March 7, 2016: "Not All Options Decay The Same"
Best Practices from April 27, 2016: "Differences Between Theta & Extrinsic Value"
Watch this segment of Options Jive with Tom Sosnoff and Tony Battista for the key takeaways and the results of our study which explain why we default to the 45 DTE.
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