To wit, do you profit more off options, the shorter-term they are like 0 DTEs? I know that option premium correlates negatively with duration.

Pre-suppose you think some biotech will discover a medical cure and skyrocket, but you don't know when. So on a Thurs, you buy one each of a whole option chain for a company. So you have 1 option each of a 0 DTE, 7 DTE, 21 DTE, ..., 365 DTE, ..., to a 2-year LEAP.

The next day, the cure is discovered and the company's share price rockets! Do the shorter-term options necessarily outperform the longer-term options? Or does this depend on other variables?

I ask because gain-flaired posts appear to feature shorter-term options, like a \$600K+ gain on SLV in 3 days, $69,420 in a month, \$35K to \$1.25M in approx. 4 months, \$800 to \$40K in 2 months. I'm not wealthy enough to, and don't, gamble on options, and I know there are many posts flaired Loss too.

  • 2
    $\begingroup$ There’s a quantitative finance stack exchange, where this might be more appropriate. The question is rambling, but the answer appears to be straightforward: you get a higher return with a short-dated option if the underlyer moves ahead of expiry. But this is very basic, and unless this is obvious, option trading is probably not recommended. $\endgroup$ Aug 8 '20 at 16:09
  • $\begingroup$ @BrianRomanchuk Thanks. I'm aware, but Quant SE doesn't appreciate these unsophisticated questions. "The question is rambling" : Don't hesitate to edit my post! $\endgroup$
    – NNOX Apps
    Aug 8 '20 at 20:51
  • $\begingroup$ @AYX.CLDR You could try asking this on money.stackexchange.com $\endgroup$
    – Flux
    Aug 16 '20 at 18:01

The answer is more complex than you realize so there's no one size fits all answer.

The simplest answer is that nearer term options cost less so the ROI is higher if you get a move in your direction. Suppose that you are buying at-the-money calls. The extreme example is a very large move in your favor that drives all of the now in-the-money option price to their intrinsic value. Your profit will be the intrinsic less the cost of option. Cheaper options make more. However, this is far less likely to happen with one and two year LEAPs because some of that price move is converted to time premium and that reduces profitability.

Another way to look at the above is via an equal dollar investment. I could buy ten one week options for a one dollar each or I could buy one $10 same strike option that expires in one year. That's leverage. If you get that aforementioned move, the bang for the buck is with the leverage.

Here's the big fly in the ointment in your question. Part of your thesis is:

Pre-suppose you're "playing earnings with options" (the day before earnings).

When there's a pending earnings announcement, implied volatility increases, sometimes sky-rocketing for higher beta issues. That additional cost affects nearer term expirations far more than further term expirations. You therefore 'overpay' more for near expirations and that's a large drag on near term option performance.

To complicate this picture even more, with longer term options more, dollar-wise, IV contraction affects longer term options more. IOW, if you have a one week option one dollar option and a one year same strike ten dollar option, a 50% IV contraction is going to result in a loss of 50 cents and five dollars, respectively (the contraction isn't exactly 50% in each but it's close enough).

So you have nearer term options that cost more in terms of IV and further term options that are hit harder dollar-wise by IV contraction and now we have to throw an indeterminate price gain into the mix. Words can't describe all of the possible P&L's.

The short answer is that if you utilize an option pricing model and vary the inputs, you'll get a feel for the behavior of different options as price, time and implied volatility vary.

And as an aside, I'd suggest that you avoid buying expensive options the day before an earnings announcement. You're paying through the nose and you have to be more right just to break even, let alone profit. If you're going to 'play', consider ways to sell expensive near term premium and buy less expensive further expiration premium.

  • $\begingroup$ Thanks! I oughtn't have exemplified "playing earnings" because I actually don't do that, as you reminded me. I've changed my example to expecting some catalyst some time in the future. Does my edit affect your answer? $\endgroup$
    – NNOX Apps
    Aug 12 '20 at 19:39
  • $\begingroup$ LOL. You deleted 'playing earning' from one paragraph but it still lives in the following paragraph. Even if you delete that, the expectation of a biotech discovering a medical cure would likely have an implied volatility expansion as well. If this was a plain vanilla no news expected scenario, then my answer would be the same less the explanation of extreme IV expansion and contraction. As a general rule, nearer term options tend to have mildly higher IV but that's only a small factor in this. Run some option model pricing what ifs and this will all be clearer. $\endgroup$ Aug 12 '20 at 20:04
  • $\begingroup$ Thanks! I rectified the following paragraph. $\endgroup$
    – NNOX Apps
    Aug 13 '20 at 1:18

You may profit more off of short-term options in terms of returns. The reason is simple: with less time to expiry, the time value of an out-of-the-money option is near 0. However, this is only true if the options expire in-the-money -- a huge "if."

There are a few caveats that are crucial:

  • Options impound the entire future expected distribution of returns, so you are unlikely to make easy money.
  • Any post on Reddit or other social media on money made trading or trading opportunities is likely to be worthless and could be trying to lure you into a pump-and-dump or other manipulation. I would stop reading such posts on Reddit.
  • You mention options maturing in 7 and 21 days as well as LEAPS. Weekly expirations tend to be very illiquid as do LEAPs. Quarterlies are your most liquid expiries; I'd stick to those.
  • The bid-ask spread can be quite wide for weeklies, LEAPS, and out-of-the-money options near expiry. You could easily pay a bid-ask spread that is nearly the quoted price of the option -- so a 100% bid-ask spread.

Glad to hear you aren't planning to trade this on your own. I've traded options for years professionally and even I will not trade options in my personal account.


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