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Aug 15, 2016

Comparing 30 and 60 Days to Expiration

By:Josh Fabian

We frequently discuss selling options 45 days prior to expiration (DTE). One problem often encountered is 45 day expiration cycles do not exist unless we use non-standard (i.e., weekly) options. That leaves us a choice between selling options expiring in 30 or 60 days. Okay, but which one should we use?

Selling options 45 DTE is the sweet spot at which the extrinsic premium in an option begins eroding at an accelerated rate. One more time in English: options begin losing value more quickly around that 45 DTE period. We use the accelerated decay to our advantage by selling premium.

Often times we are forced to chose between options expiring in less than 30 days or more. 30 and 60 DTE options have different pluses and minuses. For instance, 30 DTE has a higher theta decay. However, 60 DTE allows us to sell options further out of the money. Determining which series to choose is something we asked our research team to investigate.

To understand which expiration series we should choose, we conducted a study. We looked at selling one standard deviation strangles in SPY on 1700 separate occasions (which helped explain why none of us have a decent tan despite it being nearly August). We sold both the 30 and 60 DTE strangle and then compared results when we let them expire versus actively managing the trades.

What we learned is that there is no clear winner between these cycles. Looking at the results when trades were held until expiration, the average daily P/L for the 30 day option was greater than the 60 DTE. However, the win rate for the 60 DTE cycle was slightly higher between the two.

When we actively managed our trades, the results were similar. Again, the average daily P/L was greater for the 30 DTE; however, the 60 DTE win rate was higher. So what does this tell us?

Our primary takeaway from this study was we need to get outside more. After that, the conclusions reinforced benefits to selling options with 45 DTE. When forced to choose between 30 and 60 days, there is little difference and the choice is up to the individual trader. Tom and Tony prefer defaulting to the 30 DTE (I do as well, for what that might be worth). We like to maximize the number of occurrences created and using 30 DTE cycles helps us do just that.
 


Josh Fabian has been trading futures and derivatives for more than 25 years.

For more on this topic see:

Market Measures | Comparing 30 and 60 DTE: July 22, 2016

 


Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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