Hi, let's say it's Friday and the ES price is 1882 and I speculate it will stay at 1880 or higher within next few days. I choose credit put spread +1875/-1880. Why should I choose longer expiration and get only 1$ premium and have 7/14 days risk? Isn't it better to get today's expiration and get 1.25$ in case today's close ends at 1880 or higher? Why there isn't better premium for longer spread expiration? Thanks for explanation Peter
The problem is you are only looking at the "Bid" price. You should be looking at the midpoint for a more realistic view. If you use midpoints then the credits are $1.625, $1.75, $1.75.
I know I can reach better bid price using limit order, but even with midpoint level the difference (1.625 vs 1.75) is very small. Yes, the price (P/L) is more sensitive in case of shorter expiration but it doesn't matter because I have no SL and except the whole risk (1880-1875+1.25)=3.75$ What are the main disadvantages of the shorter expiration then?
Here you have another example, where even MID premiums are worse (lower) for the longer expiration times.
Or is there theoretical negative Gamma danger of short term expiration against longterm one for the same premium?
Your example is using a futures product. Set up the same verticals in something like AAPL and it will look very different. There will always be more credit for more time until expiration. When you are selling right near expiration there is very little Theta left (so your and the Gamma risk is about as high as it's going to get)....means your deltas will change very quickly with any move in the price. When you sell with more duration you get to collect Theta.
P...when you are trading option spreads in the ES with a few days to expiration you are essentially trading the underlying.. as if you were buying or selling ES cash. As Arch says you trade spreads to basically utilize theta or vol. Of course a spread will cut margin risk and define your loss, however with only a few days you may....if your right on direction more easily "leg" into a spread because it does move...gamma...again its akin to just trading the underlying. Spreads are more useful a week or few out.
You are right, that for APPL premiums look slightly different, but not for SPX&SPY which are using index as underlying (not future)... So you mean, weekly spreads are more useful, because the week premium is generated more from time and spread P/L is not so sensitive to price changes as in case of day spread?