Is it Better to Enter an Options Trade With 30 or 60 Days to Expiration?

all right that we've got a segment coming up this is we're looking at the difference between 30 and 60 I'm sorry between 30 and 60 days we know 45 days it's a sweet spot but outside of the sweet spot what we do that's correct how did we get here when you're in between right when you're a tweener decision time there's more of a decision to make here that there isn't most other in most other situations we're becoming such a politically disenchanted Society that that we don't the old decision time used to be around like elections now nobody cares decisions they're everybody's decision is that there are no decisions anymore so so now we talk about decision time with respect to market measures 30 or 60 days to expiration what do you think well if I wasn't if I hadn't looked at this I would say 30 days okay so somebody sent me this same email and I looked at the email that this is a while ago I wrote back to my said you know what I probably default to 30 days most most traders default to the shorter timeframe and I don't and I know 60 days will work because if 45 days work 60 days I've done a lot of research that kind of leans towards the 60 days but I wanted to answer honestly and I was in 30 days okay so I answered 30 days and and I also said that I'm although I'm sure you know 45 days is optimal in 60 days I'm sure probably worse equally as well or something I think that you know when when the default comes you're always going to default to the shorter timeframe if you're in periods of low volatility and so my suggestion was in periods of high volatility and you were locking in something for a longer period of time maybe that's the reason you go to 60 days but in periods of low volatile like we have now I don't I think it's kind of a no-brainer you go to the shorter period you go to the shorter 30 days because if you have less opportunity you go to the shorter timeframe so possible reasons we may choose 60 over 30 strikes are further out of the money more time to go for that money okay that makes sense additional credit okay that makes sense significantly less gamma risk upon entry a significantly less gamma risk upon entry which is the verse the first half of the day Steckler ation so what they're saying here is hey for the first 30 days here you kind of get a free look correct that's all mm-hmm that's all you kind of get a free look so all right so let's take it possible reasons we may choose 30 over 60 higher theta faster rate of decay less time in the trade and less volatility exposure that was kind of the comment that I made if you're gonna be doing in periods of low volatility you probably want to keep it as short as possible because that gives you the least amount of volatility exposure if you've got a periods of high volatility then you want to extend the time because you're comfortable where you're locking in other words if I'd be ranked as 100 I'm gonna go to 60 days if I be ranked is if I be ranked as zero I'm gonna go the shortest time frame possible I have a friend that's a professional trader in the business and he said to me he goes I go what are you doing to make a living and right now like howdy how're you guys surviving there what are you trading and he goes well two years ago we put positions on in the in Apple when volatility was over you know was in the high 40s and low 50s today two years out and he goes so we put on 14 15 s not 16 s I think just 14 year 2014 and year 2015 two years ago in 2000 and beginning of 2013 he goes one when Apple volatility was really high we just made a bet that for the next two years we're never see anything like this so we went out to the longest duration we can it's good but great bet but it's been supporting him for two years now yeah he's like he's like listen I made a great bet and and I cut it off but now what do I do yeah I kind of practice what you guys preach but this is but we don't preach going out two years but this is the perfect example in this case going out two years I mean it kept his business alive sure so decision time 30 or 60 days to expiration here's the study we looked at the S&P 500 the SPX we looked back five years we sold the 80% out of the money strangle which is 90 percent on each leg 90 percent inch leg beans 10% of the money in it there's a 10 percent chance the puts out are going the money there's a 10% chance the call side will go on the money okay and that is 10 on each side is an 80% out of the money strangle okay that's that's how we write and then which means it's not a big credits 30 days to expiration 60 days to expiration we held the trade until expiration or we held the trade for 30 days I won't explain this because it's I don't want any confusion here so holed up in 30 days to keep it equal with the 30 days in the front this is correct but 30 to 60 days to expiration held to expiration or held for 30 days 80% out of the money strangle 10% on each side so first here is the held to expiration slide now this is again there's there's there's gonna be a lot of questions and subjectivity around these results we're not going to even paint a very hey it has to be done this way or not you're not crowning a winner no we're not crowning a winner because then the reason we're not crowning a winner is because the percent of wins and the number of wins was so strong in both cases that that that it's clear that it's you know it's clear that it's worth to do yeah well in some capacity and not everybody you know this this was this study was actually indifferent to to IV rank but this study allowed us were just talking about time here yeah we're just talking about time and we would have never done this you know the same we don't trade this way we would look for other underlyings and it just happened to work here because the markets done nothing for the last you know two years 60 expiration cycles five years pretty much just ground higher 30 days to expiration serious expiration you can see the difference it's just in this case it's the payouts almost the same yeah yeah no like you said that it's hard to crown it's hard to crown a winner yeah that's hard to crown a winner that's exactly right they both look good the 30 days had more volatility which is exactly what you expect because there's more gamma risk in the 30 days what would I what I mean by that is if you look at your biggest loss you're looking at the P if you're looking at the piano you biggest loss is through this yeah okay that's so you have looking for if you're looking for like a tiebreaker type of thing and then you couple that with the pl being double yeah the only thing is you'll just kind of default to sixty days I'm not so sure because because it only gave you you're in a very you're in periods of low volatility never took any heat you take all the market context I mean yeah if you're gonna look for a tiebreaker you'd probably say it's only because you had more volatile in the 30 days which you should expect mm-hmm because you have much bigger gamma as the closer you get to expiration but the results very similar P&L wise very similar number of wins very similar percent of wins and all things considered you know except for the biggest loss you're talking about a situation where okay I got it right it's it's it's kind of a toss-up now let's go to help for 30 days okay so in this case now you you're holding for the first 30 days and you can see that just like it's supposed to again your your 30 day hold here because it's gonna have faster gamma mm-hmm okay you don't outperformed by by in this case you know by 33 percent yeah okay you know and so now are you going back to the I mean now and you a couple of two together the answer of being 30 days appears to work right if you're holding them only for 30 days yeah again I am not so sure that that it's clear-cut I think that if you if you hold something for 68 zombies that closer now you got the P&L on the unexpected lower return though if your whole December 60 days you expect a lower return I mean that's the expectations going in is hey you know what I'm gonna have a much lower return so I'm gonna have a lower return I'm gonna have and that percentage of next winter 52 percent makes sense because you're only holding up a half the amount of time I'm just saying it's in it's in line yeah it's only line so again we're not this there's no break away there's no break away there's no huge takeaway here right and there's no information that we're gonna stick in our back pocket this is just gonna help you when it comes to making decisions so you don't sit there and fret I mean part of what we do is make this make the decision making process easier so now when somebody says to you I don't know whether I should go I can't do 45 days should I go 30 days or 60 days the first thing I say is well you know what you take a little bit more risk if you go if you go 30 days and you're gonna make a little bit less money if you go 60 days correct okay what do you need in your account though I mean if you already have a lot of that's what it comes down to so what it ultimately comes down to is my response to this person what I originally said hey you know what it's a thirty days to expiration my choice here it's okay yeah no no it's okay you didn't do anything wrong if you didn't get my bus I would say again I would say if they had really high volatility I would consider the 60 days to expiration but since the volatility has been really cheap and it's still cheap going out into time I think you have to just kind of you know you have to stay a little bit shorter and you have to deal with the additional gamma risk which means your biggest loss is gonna be worse than you know your biggest loss may not be that pretty mm-hmm great good job it's it's a very strong study because it shows how consistent and the metrics are the the first study we did today showed that for four counter-trend moves for contrarian moves small accounts there was a huge edge to buying calendar spreads after something had a big run-up then mine put debits pressed that was clear as day all this is showing is hey kind of what we thought there's a big number if you say 30 days and less and there's a much smaller number if you go out to 60 days but your risk and the amount of rotate and sorry amount of volatility the chips take on your P&L is less for 60 days and that may be the right trend then maybe the right trade if you have high volatility

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Keywords: tastytrade, tastytrade.com, tasty trade, tastytrade network, tom sosnoff, tony battista, finance, options trading, how to trade options, trading options successfully, tastytrade options, financial investment, stock market, Get Tasted, trade expiration, days to expiration, trade window, Option, Expiration, trade entry

Id: TCg1EX6vc2Y

Length: 10min 51sec (651 seconds)

Published: Wed Aug 20 2014