Why Similar Short- and Long-Dated Option Prices May Occur

Summary

The document describes an observation in a less liquid stock: in-the-money options at the same strike, with three and six months remaining, recently traded at nearly the same prices despite elevated implied volatility. The author compares the quotes with Black–Scholes–Merton valuations and says both are near their estimated model values, then asks whether the longer-dated contract should command more value because it has more time remaining.

The excerpt poses possible position changes, such as switching from the shorter expiry to the longer one, but provides no answer or supporting analysis. It therefore serves mainly as a question about option valuation rather than a strategy recommendation. Similar premiums do not by themselves establish that one contract is mispriced: the stock’s forward level, dividends, rates, volatility by expiry, exercise style, and quoted liquidity can all affect value. The stated model comparison is not enough to assess those inputs or the costs and risks of rolling a position.

Key ideas

• The author observes nearly equal prices for same-strike in-the-money options with different expiries in a lower-volume stock.
• More time to expiry can add time value, but the premium also depends on market inputs and contract features.
• A comparison with model valuations is only as reliable as the inputs and assumptions used.
• The excerpt does not resolve whether switching expiries is advantageous or provide a trading rule.

Tags

# Short-Term Option Contract Worth Same as Long Term Option Contract At Same Strike?


# Short-Term Option Contract Worth Same as Long Term Option Contract At Same Strike?












Let's say that I'm analyzing option contracts for ABC Company, which typically trades at lower volumes. While researching ABC Company, I notice that for a given strike price, contracts that expire in 3 months have recently traded at nearly the same price level as contracts that expire in 6 months. Both contracts were ITM and had higher IV.

I understand that ABC Company trades at lower volumes, and it could just be a fluke, but wouldn't the contract that expires in 6 months be worth more on time value alone? If I'm long the shorter-term contract, wouldn't it make sense to close the position and then go long on the longer-term contract (maybe even sell the shorter-term contract)? Or, alternatively, would I close it out and leave the longer-term contract alone since I'm ITM and still have time value to capture on the short-term contact? Maybe the market believes the price of the underlying will be unchanged 3 to 6 months out.

Strangely enough, I should note that I estimated the price of both contracts using BSM, and both are trading near their BSM valuations.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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