In the world of selling options, there are usually two very different strategies around how far from expiration you should sell the options. In general terms . . . .
- You should sell options that will expire in 45 days, because that is when theta (the rate the option value is decaying) starts to really accelerate.
- You should sell options that will expire in 100-150 days.
I’ve tried both (and many in between), extensively, and found out what works for me.
If I do a defined risk trade (like an iron condor), I will choose 45 days until expiration. However, I almost exclusively sell naked options and I always try to sell 150 days from expiration. This has been the most consistently profitable strategy for me. Here is why.
- You can collect a decent premium and be way further out of the money. Sure, theta is accelerating at 45 days to expiration, but so is gamma . . . which means even the smallest move in the stock starts to really hurt the trade. When I used to sell options at 45 days out, it seemed like I was constantly in a battle. And when I’m battling, I’m bleeding . . . . which usually means losing money. When selling at 150 DTE, I can stay way out on the outskirts. I get in a lot less battles, and when I do, I have a lot more room to move.
- 150 DTE is easier to defend. When I can be further out of the money, I have a lot more room to roll and defend. So if the stock drops to a certain level, I can roll the call side down and collect more credit, while still keeping the call pretty far out of the money. Often times, I can roll one side five times before I would have finally created a straddle. That allows a huge amount of overall credit to be collected, which really widens the break even points.
- At 150 DTE, you aren’t stuck in the trade as long as you would think. When I tell people I sell options with 150 days until expiration, they often think I’m going to stay in the trade for 150 days! The truth is, I average about 38 days in a trade. Sometimes, when there is a good volatility collapse, I can be out of a trade in 4 days (which does swing the average quite a bit). Other times, I am in the trade for 70 days. But I am almost never in a trade for more than 80 days.
I will say that selling options with 150 days until expiration takes more patience. It is not as exciting as 45 DTE, and won’t get the juices flowing as often. But my goal is consistent impressive profits, and this is the best way I have found to achieve that goal.