Choosing Option Expirations for Short Premium Trades

Summary

The document asks whether option sellers should prefer very short expirations, where time decay is concentrated, or sell options with more time remaining. It uses an at-the-money straddle example to compare premiums at two expirations and observes that the nearer-term contract offers a substantial share of the longer-dated premium. Under the simplifying assumption that implied volatility is equal across expirations, the response says the shortest available expiration has the greatest theta decay in theoretical terms.

The practical answer qualifies that comparison. Weekly options may be unavailable or thinly traded, and wide bid-ask spreads can reduce the benefit of faster decay. The volatility term structure can also differ across expirations, making a longer-dated option more attractive when it carries higher implied volatility. The example does not compare risk-adjusted returns, transaction costs in detail, or how exposure changes through time, so theta alone is not enough to establish an optimal selling schedule.

Key ideas

• Assuming equal implied volatility across expirations, shorter-dated options provide greater theta decay.
• A larger premium on a longer-dated option does not alone determine which expiration is preferable.
• Weekly contracts may be unavailable or too illiquid to trade efficiently.
• Bid-ask spreads can offset the apparent advantage of faster time decay.
• Differences in implied volatility across expirations can favor selling a longer-dated option.

Tags

# Option writing optimal sell time


# Option writing optimal sell time












When selling options, e.g. a straddle I read often the optimal time for selling options is 30-40 days until expiration.

For me intuitively the optimal time would be around one week until expiration because the option will loose most of it's time value in the last week (theta is highest).

So for example when we look at the AAPL options and want to sell a ATM straddle on 8/15/2015:

- Selling the Aug. 21 116 Straddle we would collect 1.56+1.57=3.13 premium.

- Selling the Sep. 11 116 Straddle we would collect 3.50+3.39=6.89 premium.

So basically I could collect about 1/2 of the premium in the last week, and then do another trade next week and collecting another 3 premium and so on, so why is it more optimal to sell a lower theta position? Also the longer to expiration position has 3 times more time to go in an unfavourable direction.

## Answer by baerrus (score 1, accepted)

https://quant.stackexchange.com/a/19327

If you assume that IV of different expiration options is equal, then it mathematically follows that you are correct. Weeklies would give you the maximum theta decay. That is the theoretical answer.

In practice, you may not have weeklies on every stock or index and you might have them but they trade too thinly. Wide bid/ask spreads etc. Also sometimes there will be a sizable skew between the expirations and you would want to sell the higher one.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.