The phrase, “timing is everything,” does not only apply to broad life experiences and opportunities, but also in the world of derivatives trading! Today’sconversation is centered around and the difference between implementing and with respect to that timing.
Tom and the Bat kick of the show with a very visual portrayal of how naked options trades can bein time indefinitely without much cost to the trade’s profitable. Vertical spreads pose a different story when we start to think about their inability to be rolled out in time for a net credit. This conundrum is the crux of today’s study concerning the optimal timing for implementing spreads.The Study
- Sold the Put Spread using 15, 45, and 75 day options
- 2005 to present
- S&P 500 ETF (SPY)
We found that a push and pull exists concerning the success rate of trades and the average daily P/L when we vary time in vertical spreads. Going out further in time with longer-term trades has increased the win rate, but at the expense of daily profits. Tom’s suggestion is to try to get the best of both worlds and split the difference by looking at trades around the 45 days to expiration mark.