1

If I wish to sell put options to collect the premium, are there advantages of setting a time to expiry of 56 days as opposed to 30 days? Does this lower the risk? Here I am considering American style options.

3
  • American or European options? It makes a difference.
    – Mike Scott
    Jan 31, 2021 at 12:04
  • American versus European doesn't alter the risk. It only dictates when you can exercise. Jan 31, 2021 at 12:55
  • American-style options.
    – mr_js
    Jan 31, 2021 at 13:20

2 Answers 2

2

Option premium decay is non linear so you receive more premium per day for writing nearer term options. For ATM options, a loose rule of thumb is that the premium for ATM options is related to the square root of the time remaining. In general, that's why writers tend to sell nearer weeks/months and buyers tend to buy further out weeks/months.

A nearer expiry exposes you to less time risk.

A further expiry brings in a larger total premium so in terms of dollars, it has less risk. In terms of time exposure, it has more risk.

Note that a pending dividend and skewed IV due to or imminent news can distort this relationship.

2
  • Assuming I'm trading American options, wouldn't a longer expiry make it easier to roll or exit the position if the trade started going against me? i.e. I would pay less to buy back the put?
    – mr_js
    Jan 31, 2021 at 13:25
  • The nearer expiration is usually more liquid with a narrower B/A spread (easier and cheaper to roll). While OTM, the time premium of further expirations will increase faster than the near expiration (not good). When ITM, it will reverse. That's why it's recommended to roll before the option gets much ITM. Time decays chews up a nearer expiration faster so if challenged, you're more likely to be able to roll for a larger credit. And if you are challenged multiple times because of a large drop in the stock (short put position), you can run out of expirations to roll to. Jan 31, 2021 at 13:48
1

Does this lower the risk?

How do you think extending the period someone would possibly use your put option to sell you something at a predetermined price would possibly logically lower risk? This makes ZERO sense. The longer the period, the higher the risk that the price goes against your wishes.

Are there any major advantages of selling put options with a longer expiry date?

You get a higher premium.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .