Smooth Sailing With Options


Now that IWM has three expirations per week, the question is, do we make more money by selling two or three day contracts twice a week or one, one week contract? Once again, in my endless pursuit of options trading excellence, I have spent several hours trying to answer this question and I think I have an answer. I looked at put options chains, comparing returns at different strikes for different time periods. It turns out that the short answer is, yes. When you sell shorter, two or three day put contracts at or near the money, they do indeed pay a little better cumulatively or per day than going out a week. Two short contracts pays more than one long contract. If you look at the number of days in the contract divided by the premium paid, you get the per day return. That difference was consistently anywhere from a couple of pennies per day to twenty cents, depending on how close or far away you are from the money.

You gain a little nimbleness in the shorter trades, since the time frame is shorter. IWM won’t move as much in two days as it might in a week. It also means you have to trade more often, which means more time sitting in front of the computer. Maybe not something desirable. It also takes more time just to figure it out each time. So if you’re willing to put in more time and more trades, there is a slight edge to gain in selling short two-three day puts over one week contracts. I think I’ll do short term contracts when I have time and the difference is worthwhile, otherwise, I’ll just sell out a week like usual.

Covered calls followed the same pattern. For two-three day contracts, more premium per day when close to the money.

Smooth Sailing With Options


When you sell an option on Friday for the next Friday, you’re looking for seven days of time value in your premium. But when/where does the time value for the two days of the weekend go? Are they discounted by Monday or on Monday? Since I didn’t know, long ago I experimented with selling options on Friday and holding back some, then comparing both sides on Monday to see if there was any difference, once you discounted any stock price movement. As far as I could tell there was very little difference. So this week I did some digging and I did find an explanation on the NASDAQ site. It turns out that yes, there are seven days of time value over the week Friday to Friday, even though the market is open only five days. Importantly for us, however, the market makers (the clearing agencies, about twenty of them) discount the weekend time value on Friday, not Monday, and sometimes even late Thursday, although that is rare. So that means if you’re going to roll out a week, Thursday is the day to do it. Once you get into Friday, you’ve already lost most of the time value for the weekend. Since anything can happen over the weekend, it’s probably better to just let your positions expire Friday and sell again on Monday. You don’t lose any time value premium but you do jump over the weekend, reducing your risk.

I did not know this. I’ve been rolling on Fridays, thinking I was getting that time value. But I confirmed this and my experimental trading shows the same thing, so when it works out, I’m going to try and get my rolling done on Thursdays.