How to select the right option expiration period?

A

ARNYC

I am new to options trading and am getting burnt because I have no idea how to select the right expiration period.

When GoPro went down, I selected a two week period to buy calls. Go pro did not move in those two weeks and is moving now.

Now I have IBB (Bio Tech ETF) put debit spread expiring April 2015. IBB is down so much today but most of the gain on the long put was offset by the loss on the short leg. It appears again my direction was right, but the event happened too soon and my timing may prove to be wrong.

Are there any factors/guides/levels/tools you can suggest that can guide me in selecting the expiration period when I buy/sell options?. (I know no "rule" or "guide" could have predicted today's market action, but are there any that I should follow in the normal course? I admit I have no clue why I picked April for IBB and Middle of March for GoPro)

Thanks

Arnyc
 
ARNYC said:
I am new to options trading and am getting burnt because I have no idea how to select the right expiration period.

When GoPro went down, I selected a two week period to buy calls. Go pro did not move in those two weeks and is moving now.

Now I have IBB (Bio Tech ETF) put debit spread expiring April 2015. IBB is down so much today but most of the gain on the long put was offset by the loss on the short leg. It appears again my direction was right, but the event happened too soon and my timing may prove to be wrong.

Are there any factors/guides/levels/tools you can suggest that can guide me in selecting the expiration period when I buy/sell options?. (I know no "rule" or "guide" could have predicted today's market action, but are there any that I should follow in the normal course? I admit I have no clue why I picked April for IBB and Middle of March for GoPro)

Thanks

Arnyc
More...
Really comes down to your backtesting your ideas well enough over several years, doesn't sound like you have done much? Not until you have developed a Trading Plan should you trade.
Unless you can have all the answers to possible problems should you start trading.
 
If the event happened too soon, what you can do is hedge the delta and let the PnL drift vertically to the max/terminal PnL value. The theta may be accruing to you because it has probably flipped. Check your model.

At some point you may even lift the hedge when the spread is so deep ITM beyond the point of no return and just let it expire.
 
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Will you please help me follow what you said.

So I bought April 17 IBB 370 puts (Delta 80%) and sold April 17 IBB 365 puts (delta Approx 75). IBB now dropped to 341 by this evening close.

What will be the hedge in case IBB starts to climb back again?

Thank you very much.

Arnyc
 
OTM-Options said:
  • Go with the options that expire within a week or so, two weeks maximum.
  • Do not trade past your risk tolerance.


:)
More...

Thanks OTM-Options.

Do you always use one or two weeks? Can you please elaborate your experince and how you got to this preference?

I do not now trade any lots where the total costs exceeds my tolerance (Learnt the hardway after a few experiences. Luckily pretty fast).

Thanks

Arnyc


:)[/QUOTE]
 
ARNYC said:
Thanks OTM-Options.

Do you always use one or two weeks? Can you please elaborate your experince and how you got to this preference?
More...



Quoted from my post on this thread: Simple Question

====================

IMO ........ OTM options that expire within a week are much better to buy than the longer term OTM options. April 24 is too far out to be buying.


PROS
  • You are forced out of a losing trade quicker, no wasted time hoping for a rebound.
  • Cheaper entry.
  • No need to pay for time value that you don't use. Time is your enemy.
  • Entire debit can be the risk.
  • Better Risk/Reward ratio.

CONS
  • N/A



:)
 
ARNYC said:
Will you please help me follow what you said.

So I bought April 17 IBB 370 puts (Delta 80%) and sold April 17 IBB 365 puts (delta Approx 75). IBB now dropped to 341 by this evening close.

What will be the hedge in case IBB starts to climb back again?

Thank you very much.

Arnyc
More...

I had to do this as a 10x10 spread because the greeks are too miniscule for illustration. Just scale it down by 10.

Compare the 2 Graphs. There is the Current PnL and the Forward (Terminal) PnL. Understand that everyday leading to your final PnL will be different and you will have to reassess your outlook.

a) Notice that the PnL Curve drifts up because you are deep in the money. That is theta accruing to you until the options expire. You may get fluctuations between $310 to $390 but the forward PnL is the same.

b) At $355, you should worry that the spread might not reach it's full potential. You may or may not hedge depending on your outlook. Theta is still accruing to you from the upward drift.

c) At $361, you better be hedging your net delta because the Forward PnL shows a steep cliff.

d) At $370, the forward PnL is below the current PnL and you now have theta accruing against you at a much faster rate than when you first initiated the trade.
 

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Thanks.

I will do some paper trading using this suggestion. In the past I always got out if my position turned into a loss or when accrued profits started to reverse 9after paying some attention to the technicals of the underlying).
 
ARNYC said:
I am new to options trading and am getting burnt because I have no idea how to select the right expiration period.

When GoPro went down, I selected a two week period to buy calls. Go pro did not move in those two weeks and is moving now.

Now I have IBB (Bio Tech ETF) put debit spread expiring April 2015. IBB is down so much today but most of the gain on the long put was offset by the loss on the short leg. It appears again my direction was right, but the event happened too soon and my timing may prove to be wrong.

Are there any factors/guides/levels/tools you can suggest that can guide me in selecting the expiration period when I buy/sell options?. (I know no "rule" or "guide" could have predicted today's market action, but are there any that I should follow in the normal course? I admit I have no clue why I picked April for IBB and Middle of March for GoPro)

Thanks

Arnyc
More...

As you learned the hard way you have to get the timing and the direction and the magnitude of the direction right. That's what makes options tricky, but if you are right, you can make a lot of money with little capital/risk. The best guide I can give you: really think if your view really contains a timing element (or is it: sometime in the future); and learn how to judge the magnitude relative to what the options are implying.

If you had bought KRFT Mar 67.5 calls on March 10th, you would have paid 80 cents. They closed over $15 yesterday. Someone did this 15,000x.
 
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