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Choosing an Option Expiration Date

Long Term or Short Term?

(If you are looking for expiration dates, see Option Expiration Calendars 2017 to 2019)

One consideration for the long call buyer is whether to use In-the-Money, At-the-Money, or Out-of-the-Money options. See Choosing a long option Strike Price for more information.

Another consideration when buying long call options is how much time to buy. Is it better to buy the near-term options, or go out in time and maybe even buy a LEAP expiring in a year?

To answer that question we can look at the theoretical prices for options expiring anywhere from 30 days from now to about a year from now. The table below shows the theoretical prices for long calls using the strikes indicated, when the stock is now at $50.00 and the IV is 33%.

Strike Price
Time to Expiration
Long Call cost
Breakeven
Stock % movement from 50 to Breakeven
Equivalent Yearly % movement to Breakeven

45

30 days
$5.38
$50.38
.76%
9.12%
45
60
$5.91
$50.91
1.82%
10.92%
45
90
$6.39
$51.39
2.78%
11.12%
45
180
$7.62
$52.62
5.24%
10.48%
45
360
$9.51
$54.51
9.02%
9.02%
           
50
30
$1.96
$51.96
3.92%
47.04%
50
60
$2.77
$52.77
5.54%
33.24%
50
90
$3.40
$53.40
6.80%
27.20%
50
180
$4.85
$54.85
9.70%
19.40%
50
360
$6.95
$56.95
13.90%
13.90%
           
55
30
$.44
$55.44
10.88%
130.56%
55
60
$1.04
$56.04
12.08%
72.48%
55
90
$1.58
$56.58
13.16%
52.64%
55
180
$2.92
$57.92
15.84%
31.68%
55
360
$4.99
$59.99
19.98%
19.98%

Now we need to make an assumption, which is that the stock's current implied volatility is a realistic assessment of how much the stock can move in a year. With the stock at $50.00 and the IV 33%, we are assuming that the stock could be anywhere from $33.50 to $66.50 within a year. (33% down or up.)

First look at buying the ITM 45 strike calls. You can see that the yearly percentage movement needed for the stock to reach breakeven is well within the range of possibility, and it doesn't make much difference whether you buy 30 days or 360 days of time. Of course you should have a bullish outlook for the stock over whatever time frame you use, but that is assumed, since you are buying long calls.

Next look at buying the ATM 50 strike calls, and you can see that the amount of time you buy starts to make a difference. If you buy the calls expiring in 30 or 60 days, to reach profitability the stock must move more than the IV is saying it can move. If you use ATM calls, your best chance of being profitable is to buy the most time.

And last look at buying the OTM 55 strike calls. You can see that buying anywhere from 30 days to 90 days is asking the stock to move more than it's IV. Once again, the best chance of being profitable is to buy the most time.

What if you are a call seller, such as for the covered call strategy? In that case, turn everything around. Your best chance of making premium but NOT being called out is to sell the OTM 55 strike expiring in 30 days. Someone buying that call may not realize it, but they are expecting the stock to move about 4 times as much as the IV says it can move! Or if you are less worried about getting called out, or even have a neutral opinion on the stock for 30 days, you could sell the ATM 50 strike expiring in 30 days. You could make much more premium, and to make your sold call lose money, the stock still must move more than the IV is predicting. With the ATM call there is an increased chance that the stock will be somewhere above 50, so to avoid being called out you might need to buy some of the sold premium back.

Somebody out there is thinking "what if I buy the longest-term bargain, and sell short-term unlikely options against it?", so let's take a look at buying the 45 LEAP and selling the 50 strike 30 day to make a diagonal bull call or diagonal calendar:

Covered Leap Option Graph

It actually doesn't look too bad! If your opinion on the stock was something like "mostly neutral", then it could work out. You would be wise to treat $47.55 (at any time) as the price that says "not working as planned!" and cut your losses short. Anywhere from $51.96 to $57.64 in 30 days, you could close the position with a gain or possibly roll the short call out to a higher strike. Anywhere from $47.55 to $51.96 in 30 days means the short call is either worthless or can be bought back at a profit, plus you still own the long call, and can sell against it again.

 

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