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Covered call: best to sell options with 1 or 3 months until expiration?
- Thread starter crgarcia
- Start date
Quote from crgarcia:
1 month gives you more overall premium and more time decay to work for you.
Some books recommend 3 months?
Maybe to reduce commissions, or to require less work for casual investors?
Is there a reason to sell covered calls with 3 months instead of every month?
This is truly a straegy where one size does not fit all.
A case can be made for and against selling every individual option that trades. Your task is to find an options that fives you a position that makes you comfortable, leaves you with enough profit potential to make the trade worthwhile - all with a level of risk that is acceptable.
The bottom line:
Front moth options decay faster. That gives the chance to earn more cash per day. But, these options have a higher gamma. That means if the position moves against you, you can expect to lsoe more money more quickly when you are short the front-month options.
Options that have a longer lifetime provide more initial cash. As Tom said, that gives you better downside protection, but it comes with less rapid time decay. You earn less per day.
But, these options have less gamma, so that a major move costs less. It's still a money-losing event, but it's less costly than being short near-term options.
There is no 'right' answer. It's strictly a personal decision.
Mark
http:/blog.mdwoptions.com
You might want to have a look at static, annual and max profit potentials of the particular options. Those numbers in relation to what I think the stock will do in 1-3 months often help make the decision for me.
Also, remember that you will be holding a 3 month option during an earnings release and often a dividend declaration whereas a 1 month option might cut across those events.
- Ray.
Also, remember that you will be holding a 3 month option during an earnings release and often a dividend declaration whereas a 1 month option might cut across those events.
- Ray.