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The Skinny on Options: Abstract Applications

Diminishing Expiration Cycles

The Skinny on Options: Abstract Applications

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

One of the most applicable laws in all of economics is that of ‘Diminishing Returns’. Generally speaking, this means that your first units of input are the most valuable in their production of output, with each additional unit of input yielding less and less productive output.

As tastytraders, we can take this very same idea and apply it to an option’s expiration cycle. Specifically, our research has shown us that the first half of the cycle (45 DTE to 21 DTE) is clearly the most beneficial, the middle (21 DTE to 7-10 DTE) is more up-in-the-air, and the end (7 DTE and less) is simply too risky for the potential reward. Thus, it seems that the Law of Diminishing Returns maps perfectly into our trading style.

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